You are on page 1of 138

Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdon d ee@gmail.

com
1 of 73
ANSWERS TO BAR
EXAMINATION QUESTIONS
IN
TAXATION LAW
* ARRANGED BY TOPIC *
(1994 2006)
Ed!"d #$d A%%#$&"d '()
ROMUALDO L. SEERIS II
Silliman University - College of Law
From the ANSWERS TO BAR EXAMINATION QUESTIONS
by the UP LAW COMPLEX
&
PILIPPINE ASSOCIATION OF LAW SCOOLS
June 3, 2007
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdon d ee@gmail.com
2 of 73
FOREWARD
This work is NOT intended FOR SALE or COMMERCE. This work is a freeware. It may
be freely o!ied and distrib"ted# ne$ertheless# %ERMISSION TO CO%& from the editors
is A'(ISA)LE to !rotet the interest of the ORI*INAL SO+RCES,REFERENCES of
this material-. It is !rimarily intended for all those who desire to ha$e a dee!er
"nderstandin. of the iss"es ommonly to"hed by the %hili!!ine )ar E/aminations and
its trend on s!eifially on Ta/ation Laws. It is s!eifially intended for law st"dents from
the !ro$ines who# $ery often# are rei!ients of deliberately distorted notes from other
"nsr"!"lo"s law shools and st"dents.
I wo"ld like to seek the ind"l.ene of the reader for some )ar 0"estions whih are
im!ro!erly lassified "nder a to!i and for some to!is whih are im!ro!erly or
i.norantly !hrased# for the arran.er is 1"st a )ar Re$iewee who has !re!ared this work
while re$iewin. for the 2
nd
time for the )ar E/ams 2334 "nder time onstraints and
within his limited knowled.e of the law. I wo"ld like to seek the reader5s ind"l.ene also
for a n"mber of ty!o.ra!hial errors in this work.
The Arranger
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdon d ee@gmail.com
* of 73
Detailed Table of Contents
GENERA+ PRINCIP+ES........................................................................................................................... 8
Basic Features: Present Income Tax System (1996).................................................................................................... 8
Basic Stages or Aspects of Taxation (26) ................................................................................................................ 8
!o""ection of Taxes: Aut#ority$ %r&inary !ourts (21) ............................................................................................... 8
!o""ection of Taxes: Prescription (21) ..................................................................................................................... 8
'irect Tax (s) In&irect Tax (199*) ................................................................................................................................ 8
'irect Tax (s) In&irect Tax (2) ................................................................................................................................ 8
'irect Tax (s) In&irect Tax (21) ................................................................................................................................ 8
'irect Tax (s) In&irect Tax (26) ................................................................................................................................ 9
'ou+"e Taxation (199,) ............................................................................................................................................... 9
'ou+"e Taxation: -#at !onstitutes 'T. (1996) ........................................................................................................... 9
'ou+"e Taxation$ In&irect 'up"icate Taxation (199,) ................................................................................................... 9
'ou+"e Taxation$ /icense Fee (s) /oca" Tax (2*) ..................................................................................................... 9
'ou+"e Taxation$ 0et#o&s of A(oi&ing 'T (199,) ....................................................................................................... 9
Imprescripti+i"ity of Tax /a1s (199,) .......................................................................................................................... 9
Po1er of Taxation: 23ua" Protection of t#e /a1 (2) ............................................................................................ 10
Po1er of Taxation: In#erent in a So(ereign State (24) ........................................................................................... 10
Po1er of Taxation: /ega"ity$ /oca" 5o(6t Taxation (24) .......................................................................................... 10
Po1er of Taxation: /egis"ati(e in 7ature (199*) ........................................................................................................ 10
Po1er of Taxation: /imitations of t#e !ongress (21) ............................................................................................. 10
Po1er of Taxation: /imitations: Passing of 8e(enue Bi""s (199,) .............................................................................. 11
Po1er of Taxation: /imitations$ Po1er to 'estroy (2) .......................................................................................... 11
Po1er of Taxation: 8e(ocation of 2xempting Statutes (199,) ................................................................................... 11
Po1er of Taxation$ In#erent in a So(ereign State (29) ........................................................................................... 11
Po1er of Taxation$ /egis"ati(e in 7ature (1996) ........................................................................................................ 12
Purpose of Taxation$ Interpretation (2*) ................................................................................................................ 12
Purpose of Taxation$ /egis"ati(e in 7ature (2*) ..................................................................................................... 12
8u"e on Set:%ff or !ompensation of Taxes (1996)..................................................................................................... 12
8u"e on Set:%ff or !ompensation of Taxes (21)..................................................................................................... 12
8u"e on Set:%ff or !ompensation of Taxes (29)..................................................................................................... 13
8u"e on Set:%ff or !ompensation on Taxes (29) .................................................................................................... 13
Tax A(oi&ance (s) Tax 2(asion (1996) ...................................................................................................................... 13
Tax A(oi&ance (s) Tax 2(asion (2) ...................................................................................................................... 13
Tax 2xemptions: 7ature ; !o(erage$ Proper Party (2*) ........................................................................................ 13
Tax /a1s$ BI8 8u"ing$ 7on:8etroacti(ity of 8u"ings (2*) ....................................................................................... 14
Tax Pyrami&ing$ 'efinition ; /ega"ity (26) ............................................................................................................ 14
Taxpayer Suit$ -#en A""o1e& (1996)......................................................................................................................... 14
<niformity in t#e !o""ection of Taxes (199=) ............................................................................................................. 14
INCOME TAXATION................................................................................................................................ 14
Basic: A""o1a+"e 'e&uctions (s) Persona" 2xemptions (21) .................................................................................. 14
Basic: 0eaning of Taxa+"e Income (2) ................................................................................................................. 15
Basic: Princip"e of Mobilia Sequuntur Personam (199*) ............................................................................................ 15
Basic: Proper A""o1ance of 'epreciation (199=) ....................................................................................................... 15
Basic: Sources of Income: Taxa+"e Income (199=) .................................................................................................... 15
Basic: Tax Benefit 8u"e (24) .................................................................................................................................. 15
Basic$ Basis of Income Tax (1996) ............................................................................................................................ 16
Basic$ 5ross Income: 'efine (1999) .......................................................................................................................... 16
Basic$ Income (s) !apita" (1999) ............................................................................................................................... 16
Basic$ Sc#e&u"ar Treatment (s) 5"o+a" Treatment (199*) ......................................................................................... 16
!ompensation$ Income Tax: 'ue to Profita+"e Business 'ea" (1999) ........................................................................ 16
!orporate: Income: 'onor6s tax$ Tax /ia+i"ity (1996) ................................................................................................ 17
!orporate$ Income Tax$ 8easona+"eness of t#e Bonus (26) .................................................................................. 17
!orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (199*) ............................................................................................ 17
!orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (29) ............................................................................................ 17
'i(i&en&s: 'isguise& &i(i&en&s (199*) ..................................................................................................................... 18
'i(i&en&s$ Income Tax$ 'e&ucti+"e 5ross Income (1999) ......................................................................................... 18
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
4 of 73
2ffect$ !on&onation of /oan in Taxation (1999) ........................................................................................................ 18
Fringe Benefit Tax: !o(ere& 2mp"oyees (21)......................................................................................................... 18
Fringe Benefit Tax: 2mp"oyer re3uire& to Pay (24) ................................................................................................ 19
Interest: 'eficiency Interest: &efine (1999 Bar).......................................................................................................... 19
Interest: 'e"in3uency Interest: &efine (1999) ............................................................................................................. 19
IT8: Persona" Income$ 2xempte& to Fi"e IT8 (199,)................................................................................................... 19
IT8$ 'omestic !orporate Taxation (199,).................................................................................................................. 19
IT8$ 'omestic !orporate Taxation (21).................................................................................................................. 20
IT8$ Persona" Income: T1o 2mp"oyment (21) ........................................................................................................ 20
IT8$ Persona" Income$ 5SIS Pension (2) ............................................................................................................. 20
IT8$ Persona" Income$ 0arrie& In&i(i&ua" (2*) ....................................................................................................... 20
IT8$ Taxpayer$ /ia+i"ities$ Fa"sifie& Tax 8eturn (29) .............................................................................................. 20
Partners#ip: Income Tax (1999) ................................................................................................................................ 21
Persona"$ Income Tax: 7on:8esi&ent A"ien (2) .................................................................................................... 21
Persona"$ Income Tax: 7on:8esi&ent !iti?en (1999) .................................................................................................. 21
Persona"$ Income Tax: Tax:Free 2xc#ange (199,)..................................................................................................... 22
Persona"$ Income Tax$ !ontract of /ease (1999) ....................................................................................................... 22
Persona"$ Income Tax$ 0arrie& In&i(i&ua" (199,)....................................................................................................... 22
Persona"$ Income Tax$ 8etiring A"ien 2mp"oyee (29) ............................................................................................. 23
Persona"$ Income Taxation: 7on:8esi&ent !iti?en (199,) .......................................................................................... 23
Taxa+"e Income: I""ega" Income (1999 Bar) ................................................................................................................ 23
Taxa+"e or 7on:Taxa+"e$ Income an& 5ains (29) ................................................................................................... 23
-it##o"&ing Tax: 7on:8esi&ent A"ien (21) ............................................................................................................. 24
-it##o"&ing Tax: 8etirement Benefit (2) .............................................................................................................. 24
-it##o"&ing Tax: 8etirement Benefit (2) .............................................................................................................. 24
-it##o"&ing Tax: 8oya"ty (22) ............................................................................................................................... 24
-it##o"&ing Tax$ !o(erage (2*) ............................................................................................................................ 25
-it##o"&ing Tax$ 'omestic !orporation$ !as# 'i(i&en&s (21) .............................................................................. 25
-it##o"&ing Tax$ Income su+@ect t#ereto (21) ....................................................................................................... 25
-it##o"&ing Tax$ 7on:8esi&ent A"ien (199*) ............................................................................................................. 25
-it##o"&ing Tax$ 7on:8esi&ent !orporation (199*) .................................................................................................. 26
-it##o"&ing Tax$ 8ea&erAs 'igest A1ar& (199=)........................................................................................................ 26
-it##o"&ing Tax$ Time 'eposit Interest$ 5SIS Pension (199*) .................................................................................. 26
DEDUCTIONS, EXEMPTIONS, EXC+USIONS - INC+USIONS..................................................... 26
'e&uction: Faci"itation Fees or >BicB+acB> (199=) ..................................................................................................... 26
'e&uctions: %r&inary Business 2xpenses (2*) .................................................................................................... 26
'e&uctions: Amount for Bri+e (21)........................................................................................................................ 27
'e&uctions: !apita" /osses$ Pro#i+itions (24) ...................................................................................................... 27
'e&uctions: 'e&ucti+"e Items from 5ross Income (1999).......................................................................................... 27
'e&uctions: Income Tax: 'onation: 8ea" Property (22) ........................................................................................ 27
'e&uctions: 7on:'e&ucti+"e Items$ 5ross Income (1999) ......................................................................................... 28
'e&uctions: 8e3uisites$ 'e&uci+i"ity of a /oss (199=) .............................................................................................. 28
'e&uctions$ Income Tax: A""o1a+"e 'e&uctions (21)............................................................................................. 28
'e&uctions$ Canis#ing 'e&uction$ Purpose (26) ................................................................................................... 28
2xc"usion ; Inc"usion$ 5ross 8eceipts (26) .......................................................................................................... 28
2xc"usion (s) 'e&uction from 5ross Income (21) .................................................................................................. 28
2xc"usions ; Inc"usions: Benefits on Account of In@ury (1999) ................................................................................. 29
2xc"usions ; Inc"usions: 2xecuti(e Benefits (1999).................................................................................................. 29
2xc"usions ; Inc"usions$ Assets$ 8esi&ent A"ien (29) ........................................................................................... 29
2xc"usions ; Inc"usions$ Benefits on Account of 'eat# (1996) ................................................................................. 30
2xc"usions ; Inc"usions$ Benefits on Account of In@ury (29) ................................................................................. 30
2xc"usions ; Inc"usions$ !ompensation for persona" in@uries or sicBness (24) ..................................................... 30
2xc"usions ; Inc"usions$ Faci"ities or Pri(i"eges$ 0i"itary !amp (1999) ..................................................................... 30
2xc"usions ; Inc"usions$ 5ifts o(er an& a+o(e t#e 8etirement Pay (1999) ................................................................ 31
2xc"usions ; Inc"usions$ IT8$ 14t# mont# pay an& &e minimis +enefits (29) ......................................................... 31
2xc"usions ; Inc"usions$ IT8$ 'i(i&en&s recei(e& +y a &omestic corporation (29) ................................................ 31
2xc"usions ; Inc"usions$ IT8$ Income rea"i?e& from sa"e (29)................................................................................ 31
2xc"usions ; Inc"usions$ IT8$ Interest on &eposits (29)......................................................................................... 31
2xc"usions ; Inc"usions$ IT8$ Procee&s of "ife insurance (29) ............................................................................... 32
2xc"usions ; Inc"usions$ /ife Insurance Po"icy (24) .............................................................................................. 32
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
. of 73
2xemptions: !#arita+"e Institutions (2) ............................................................................................................... 32
2xemptions: !#arita+"e Institutions$ !#urc#es (1996) .............................................................................................. 32
2xemptions: 2&ucationa" institution (2*)............................................................................................................... 32
2xemptions: 5ifts ; 'onations (199*) ...................................................................................................................... 32
2xemptions: Dea& of t#e Fami"y: (199=)................................................................................................................... 33
2xemptions: 7on:Profit 2&ucationa" Institutions (2) ............................................................................................ 33
2xemptions: 7on:Profit 2ntity$ Anci""ary Acti(ity ; Inci&enta" %perations (199*) ...................................................... 33
2xemptions: 7on:StocBE 7on:Profit Association (22) ............................................................................................ 34
2xemptions: Pri?e of Peace Poster !ontest (2).................................................................................................... 34
2xemptions: Pri?es ; A1ar&s$ At#"etes (1996) ......................................................................................................... 34
2xemptions: 8etirement Benefits: -orB Separation (1999) ....................................................................................... 34
2xemptions: Separation Pay (199*) .......................................................................................................................... 35
2xemptions: Separation Pay (1999) .......................................................................................................................... 35
2xemptions: Separation Pay (29) .......................................................................................................................... 36
2xemptions: StocB 'i(i&en&s (24) ........................................................................................................................ 36
2xemptions: Strict"y !onstrue& (1996) ..................................................................................................................... 36
2xemptions: Termina" /ea(e Pay (1996) ................................................................................................................... 36
2xemptions$ !#arita+"e Institutions (26) ............................................................................................................... 36
2xemptions$ 2&ucationa" institution (2*)............................................................................................................... 36
2xemptions$ 2xemptions are <ni"atera" in 7ature (2*)........................................................................................... 37
2xemptions$ 5o(6t BonusF 5iftsF ; A""o1ances (199*) .............................................................................................. 37
2xemptions$ Persona" ; A&&itiona" 2xemption (26) .............................................................................................. 37
2xemptions$ 8oman !at#o"ic !#urc#$ /imitations (29) ......................................................................................... 38
CAPITA+ GAIN TAX................................................................................................................................ 38
!apita" Asset (s) %r&inary Asset (24) .................................................................................................................... 38
!apita" 5ain Tax$ 7ature (21) ................................................................................................................................ 38
%r&inary Sa"e of a !apita" Asset (199*) ..................................................................................................................... 38
Sa"es of S#are of StocBs: !apita" 5ains Tax 8eturn (1999) ....................................................................................... 39
Tax Basis: !apita" 5ains: 0erger of !orporations (199*) .......................................................................................... 39
Tax Basis: !apita" 5ains: Tax:Free 2xc#ange of Property (199*) .............................................................................. 39
CORPORATION - PARTNERS/IP...................................................................................................... 39
Ba& 'e+ts$ Factors$ 2"ements t#ereof (2*) ............................................................................................................ 39
!on&ominium !orp)$ Sa"e of !ommon Areas (199*) ................................................................................................. 40
!orporation$ Sa"e$ !re&ita+"e -it##o"&ing Tax (199*)............................................................................................... 40
'i(i&en&s: -it##o"&ing Tax (1999) ........................................................................................................................... 40
2ffect: 'isso"ution$ !orporate 2xistence (2*) ........................................................................................................ 41
0inimum !orporate Income Tax (21)..................................................................................................................... 41
0inimum !orporate Income Tax$ 2xemption (21) .................................................................................................. 41
ESTATE - DONOR0S TAXES ............................................................................................................... 41
'onor6s Tax: 2"ection !ontri+utions (199=) .............................................................................................................. 41
'onor6s Tax$ Basis for 'etermining 5ain (1999) ....................................................................................................... 41
'onor6s Tax$ 'acion en Pago$ 2ffect: Taxation (199,) .............................................................................................. 42
'onor6s Tax$ 'onation to a Si+"ing (21) ................................................................................................................. 42
'onor6s Tax$ 'onation to 7on:StocBF 7on:Profit Pri(ate 2&ucationa" Institutions (2) ........................................... 42
'onor6s Tax$ 'onation to Po"itica" !an&i&ate (24) ................................................................................................. 43
'onor6s Tax$ 'onee or Beneficiary$ Stranger (2) ................................................................................................. 43
'onor6s Tax$ Sa"e of s#ares of StocB ; Sa"e of 8ea" Property (1999)......................................................................... 43
2state Tax: !ompre#ensi(e Agrarian 8eform /a1 (199*).......................................................................................... 43
2state Tax: 'onation 0ortis !ausa (21) ................................................................................................................ 43
2state Tax: 'onation 0ortis !ausa (s) Inter Ci(os (199*) ......................................................................................... 44
2state Tax: 5ross 2state: A""o1a+"e 'e&uction (21) .............................................................................................. 44
2state Tax: 5ross 2state: 'e&uctions (2) ............................................................................................................ 44
2state Tax: Inc"usion: 8esi&ent A"ien (199*) ............................................................................................................. 44
2state Tax: Payment (s) Pro+ate Procee&ings (2*) ............................................................................................... 45
2state Tax: Situs of Taxation: 7on:8esi&ent 'ece&ent (2) ................................................................................... 45
2state Tax: Canis#ing 'e&uctions (199*).................................................................................................................. 45
2state Tax$ Payment (s) Pro+ate Procee&ings (29) ............................................................................................... 45
BUSINESS TAXES .............................................................................................................................. .... 45
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
6 of 73
CAT: Basis of CAT (1996).......................................................................................................................................... 45
CAT: !#aracteristics of CAT (1996)........................................................................................................................... 45
CAT: 2xempte& Transactions (1996) ......................................................................................................................... 45
CAT: /ia+"e for Payment (1996) ................................................................................................................................ 46
CAT: Transactions >'eeme& Sa"esG (199,) ............................................................................................................... 46
CAT$ !o(ere& Transactions (199=) ........................................................................................................................... 46
CAT$ 2xemption: !onstitutiona"ity (2*) ................................................................................................................. 46
CAT$ 7on:CAT taxpayer$ !"aim for 8efun& (26) ..................................................................................................... 47
REMEDIES IN INTERNA+ RE1ENUE TAXES ................................................................................... 47
BI8: Assessment: <nregistere& Partners#ip (199,) .................................................................................................. 47
BI8: !o""ection of Tax 'eficiency (1999) ................................................................................................................... 47
BI8: !ompromise$ !on&itions (2)........................................................................................................................ 48
BI8: !ompromise$ 2xtent of Aut#ority (1996) ........................................................................................................... 48
BI8: !ompromise$ -it##o"&ing Agent (199=)............................................................................................................ 48
BI8: !orporation: 'istraint ; /e(y (22) ................................................................................................................. 48
BI8: !ourt of Tax Appea"s: !o""ection of Taxes$ 5roun&s for !ompromise (1996) .................................................... 49
BI8: !rimina" Prosecution: Tax 2(asion (199=) ......................................................................................................... 49
BI8: 2xtinction$ !rimina" /ia+i"ity of t#e Taxpayer (22).......................................................................................... 49
BI8: Frau&u"ent 8eturn$ Prima Facie 2(i&ence (199=) ............................................................................................... 50
BI8: Frau&u"ent 8eturn$ Prima Facie 2(i&ence (22) ............................................................................................... 50
BI8: 5arnis#ment: BanB Account of a Taxpayer (199=)............................................................................................. 50
BI8: Pre:Assessment 7otice not 7ecessary (22) ................................................................................................... 51
BI8: Prescripti(e Perio&: !i(i" Action (22) ............................................................................................................. 51
BI8: Prescripti(e Perio&$ Assessment ; !o""ection (1999) ........................................................................................ 51
BI8: Prescripti(e Perio&$ !rimina" Action (22) ....................................................................................................... 51
BI8: Secrecy of BanB 'eposits /a1 (199=) ............................................................................................................... 52
BI8: Summary 8eme&y: 2state Tax 'eficiencies (199=) ............................................................................................ 52
BI8: <npai& Taxes (s) !"aims for <npai& -ages (1999) ............................................................................................ 53
BI8$ Assessment$ !rimina" !omp"aint (29)............................................................................................................ 53
BI8$ Aut#ority$ 8efun& or !re&it of Taxes (29) ...................................................................................................... 53
BI8$ !ompromise (2*)........................................................................................................................................... 53
BI8$ !ompromise (29)........................................................................................................................................... 54
BI8$ 'eficiency Tax Assessment (s) Tax 8efun& E Tax !re&it (29) ......................................................................... 54
BI8$ 'istraint$ Prescription of t#e Action (22)........................................................................................................ 54
BI8$ Fa"se (s) Frau&u"ent 8eturn (1996).................................................................................................................... 55
BI8$ Huris&iction$ 8e(ie1 8u"ings of t#e !ommissioner (26) ................................................................................. 55
BI8$ Prescripti(e Perio&$ Assessment$ Frau&u"ent 8eturn (22).............................................................................. 55
BI8$ Prescripti(e Perio&$ !rimina" Action (26) ....................................................................................................... 55
BI8$ Taxpayer: !i(i" Action ; !rimina" Action (22) ................................................................................................ 55
!ustom: Cio"ation of Tax ; !ustom 'uties (22)..................................................................................................... 56
!ustoms$ Basis$ Automatic 8e(ie1 (22)................................................................................................................ 56
'e"in3uent Tax 8eturn (199=) ................................................................................................................................... 57
Huris&iction: !ustoms (s) !TA (2) ...................................................................................................................... 57
/5<: !o""ection of TaxesF Fees ; !#arges (199,) ..................................................................................................... 57
Tax Amnesty (s) Tax 2xemption (21) .................................................................................................................... 57
Taxpayer: A&ministrati(e ; Hu&icia" 8eme&ies (2)............................................................................................... 57
Taxpayer: Assessment: Protest: !"aims for refun& (2)......................................................................................... 58
Taxpayer: Assessment$ In@unction (2*) ................................................................................................................. 58
Taxpayer: BI8 Au&it or In(estigation (1999) .............................................................................................................. 58
Taxpayer: !ity Boar& of Assessment 'ecision$ -#ere to appea" (1999).................................................................... 59
Taxpayer: !"aim for 8efun&$ Proce&ure (22).......................................................................................................... 59
Taxpayer: 'eficiency Income Tax (1999)................................................................................................................... 59
Taxpayer: 2x#austion of A&ministrati(e 8eme&ies (199,)......................................................................................... 60
Taxpayer: Fai"ure to -it##e"& ; 8emit Tax (2) ..................................................................................................... 60
Taxpayer: 7I8! (s) T!! 8eme&ies (1996)................................................................................................................. 60
Taxpayer: %(er1it#o"&ing !"aim for 8efun& (1999) ................................................................................................... 61
Taxpayer: Prescripti(e Perio&: Suspen&e& (2)..................................................................................................... 61
Taxpayer: Prescripti(e Perio&$ !"aim for 8efun& (199,) ............................................................................................ 61
Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (199*) .......................................................................................... 61
Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (2*) .......................................................................................... 62
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
2 of 73
Taxpayer: Protest against Assessment (199=) .......................................................................................................... 62
Taxpayer: Protest against Assessment (1999) .......................................................................................................... 62
Taxpayer: Protest against Assessment (1999) .......................................................................................................... 62
Taxpayer: Protest$ !"aim of 8efun& (1996)................................................................................................................ 63
Taxpayer$ Appea" to t#e !ourt of Tax Appea"s (29)................................................................................................ 63
Taxpayer$ !"aim for Tax !re&its (26) ..................................................................................................................... 63
Taxpayer$ !ompromise after !rimina" Action (199=) ................................................................................................. 63
Taxpayer$ Protest against Assessment$ 'onor6s Tax (1999) ..................................................................................... 64
Taxpayer$ -it##o"&ing Agent$ !"aim of Tax 8efun& (29) ....................................................................................... 64
+OCA+ - REA+ PROPERTY TAXES .................................................................................................. 64
/oca" Taxation: Actua" <se of Property (22) .......................................................................................................... 64
/oca" Taxation: !o(erage (22)............................................................................................................................... 64
/oca" Taxation: 2xemption$ 8ea" Property Taxes (22) ........................................................................................... 65
/oca" Taxation: Imposition of A& Ca"orem Tax (2) ............................................................................................... 65
/oca" Taxation: /ega"ityE !onstitutiona"ity$ Tax %r&inance (24) ............................................................................. 65
/oca" Taxation: /ega"ity$ Imposition of 8ea" Property Tax 8ate (22) ...................................................................... 65
/oca" Taxation: Po1er to Impose (24) ................................................................................................................... 65
/oca" Taxation: 8emissionE!on&onation of Taxes (2*) .......................................................................................... 66
/oca" Taxation: 8u"e of <niformity an& 23ua"ity (24) ............................................................................................. 66
/oca" Taxation$ Situs of Professiona" Taxes (29) ................................................................................................... 66
/oca" Taxation$ Specia" /e(y on I&"e /an&s (29).................................................................................................... 66
8ea" Property Tax: <n&ergroun& 5aso"ine TanBs (24) ........................................................................................... 67
8ea" Property Tax$ 8e3uirements$ Auction Sa"es of Property for Tax 'e"in3uency (26) ......................................... 67
8ea" Property Taxation: !apita" Asset (s) %r&inary Asset (1999) .............................................................................. 67
8ea" Property Taxation: !apita" 5ains (s) %r&inary 5ains (199=) .............................................................................. 67
8ea" Property Taxation: !o(erage of %r&inary Income (199=) ................................................................................... 67
8ea" Property Taxation: 2xc#ange of /ot$ !apita" 5ain Tax (199,) ............................................................................ 68
8ea" Property Taxation: 2xemptionE'e&uctions$ 'onor6s Tax (199=)......................................................................... 68
8ea" Property Taxation: 2xemption: Ac3uiring 7e1 Principa" 8esi&ence (2) ....................................................... 68
8ea" Property Taxation: Fun&amenta" Princip"es (199,) ............................................................................................ 69
8ea" Property Taxation: Princip"es ; /imitations: /5< (2)................................................................................... 69
8ea" Property Taxation: Property So"& is an %r&inary Asset (199=) ........................................................................... 69
8ea" Property Taxation: <n&ergroun& 5aso"ine TanBs (21) ................................................................................... 69
8ea" Property Taxation$ 2xempte& Properties (26) ................................................................................................ 69
TARI33 AND CUSTOMS DUTIES ........................................................................................................ 7
!ustoms: IF"exi+"e Tariff !"auseG (21) .................................................................................................................. 70
!ustoms: A&ministrati(e (s) Hu&icia" 8eme&ies (199,) ............................................................................................ 70
!ustoms: Importation (1999) .................................................................................................................................... 70
!ustoms: Huris&iction$ Sei?ure ; Forfeiture Procee&ings (1996) ............................................................................. 70
!ustoms: Jin&s of !ustom 'uties (1999) ................................................................................................................. 70
!ustoms: Jin&s of !ustom 'uties (199,) ................................................................................................................. 71
!ustoms: 8eme&ies of an Importer (1996) ................................................................................................................ 71
!ustoms: 8eturning 8esi&ents: TouristETra(e"ers (24) .......................................................................................... 71
!ustoms: Sei?ure ; Forfeiture: 2ffects (199*) .......................................................................................................... 71
!ustoms: Steps in(o"(ing Protest !ases (199*)........................................................................................................ 72
!ustoms$ Basis of 'utia+"e Ca"ue$ Importe& Artic"e (29) ....................................................................................... 72
!ustoms$ !ounter(ai"ing 'uty (s) 'umping 'uty (29)........................................................................................... 72
!ustoms$ Taxa+i"ity$ Persona" 2ffects (29)............................................................................................................ 72
OT/ER RE+ATED MATTERS ............................................................................................................... 73
BI8: BanB 'eposits Secrecy Cio"ation (2) ............................................................................................................ 73
BI8: Secrecy of BanB 'eposit /a1 (24) ................................................................................................................. 73
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
4 of 73
GENERA+ PRINCIP+ES
Basic Features: Present Income Tax System (1996)
What are the basic features of the
present income tax
system"?
SUGGESTED ANSWER)
Our present income tax system can be
said to have the following basic features:
(a) It has adopted a
COMPREHENSIVE TAX
SITUS by using the nationality
residence and
source rules! "his ma#es citi$ens and
resident aliens
taxable on their income derived from all
sources while non%resident aliens are
taxed only on their income derived from
within the &hilippines! 'omestic
corporations are also taxed on universal
income while foreign corporations are
taxed only on income from within!
(b) "he individual income tax system
is mainly PROGRESSIVE IN
NATURE in that it provides a
graduated rates of income tax!
(orporations in general are taxed at a
)at rate of thirty *ve percent (+,-) of
net income!
(c) It has retained MORE
SCHEDULAR THAN GLOBAL
FEATURES with respect to individual
taxpayers but has maintained a
more global treatment on
corporations!
Note: The following might also be cited
by the bar candidates as features of the
income tax system:
a! Individual compensation income
earners are taxed
on modified .ross Income (.ross
compensation income less personal
exemptions)! /elf%employed and
professionals are taxed on net income
with deductions limited to seven items
or in lieu thereof the forty percent
(01-) maximum deduction plus the
personal exemptions! (orporations are
generally taxed on net income except for
non%resident foreign corporations which
are taxed on gross income!
b! "he income tax is generally imposed
via the self% assessment system or pay%
as%you%*le concept of imposing the tax
although certain incomes! Including
income of non%residents are taxed on
the pay%as% you%earn concept or the so
called withholding tax!
c! "he corporate income tax is a one%layer
tax in that distribution of pro*ts to
stoc#holders (except to non- residents)
are not sub2ect to income tax!
Basic Stages or Aspects of Taxation (26)
3numerate the + stages or aspects of
taxation! 3xplain each! (,-)
SUGGESTED ANSWER)
"he aspects of taxation are:
(4) 5367I8. 9 the act of the legislature
in choosing
the persons properties rights or
privileges to be sub2ected to taxation!
(:) ;//3//<38" and (O553("IO8 9
"his is the act of executing the law
through the administrative agencies of
government!
(+) &;7<38" 9 the act of the taxpayer in
settling his
tax
obligations!
!o""ection of Taxes: Aut#ority$ %r&inary !ourts (21)
<ay the courts en2oin the collection of
revenue taxes?
3xplain your answer!
(:-)
SUGGESTED ANSWER)
;s a general rule the courts have no
authority to en2oin the collection of revenue
taxes! (/ec! :4= 8I>()! ?owever the (ourt
of "ax ;ppeals is empowered to en2oin the
collection of taxes through administrative
remedies when collection could 2eopardi$e
the interest of the government or taxpayer!
(/ection 44 >; 44:,)!
!o""ection of Taxes: Prescription (21)
<ay the collection of taxes be barred by
prescription?
3xplain your answer!
(+-)
SUGGESTED ANSWER)
7es! "he collection of taxes may be
barred by prescription! "he prescriptive
periods for collection of taxes are governed
by the tax law imposing the tax! ?owever if
the tax law does not provide for
prescription the right of the government to
collect taxes becomes imprescriptible!
'irect Tax (s) In&irect Tax (199*)
'istinguish a direct from an
indirect tax! SUGGESTED ANSWER)
; 'I>3(" ";@ is one in which the taxpayer
who pays the tax is directly liable therefor
that is the burden of paying the tax falls
directly on the person paying the tax!
;n I8'I>3(" ";@ is one paid by a person
who is not directly liable therefor and who
may therefore shift or pass on the tax to
another person or entity which ultimately
assumes the tax burden! (Maceda v.
Macaa!"#
$%& SCRA
&&$'
'irect Tax (s) In&irect Tax (2)
;mong the taxes imposed by the
Aureau of Internal
>evenue are income tax estate and donorBs
tax value% added tax excise tax other
percentage taxes and documentary stamp
tax! (lassify these taxes into direct and
indirect taxes and differentiate direct from
Indirect taxes! (,-)
SUGGESTED ANSWER)
Income tax estate and donorBs tax are
considered as direct taxes! On the other
hand value%added tax excise tax other
percentage taxes and documentary stamp
tax are indirect taxes!
'I>3(" ";@3/ are demanded from the very
person who as intended should pay the
tax which he cannot shift to anotherC while
an I8'I>3(" ";@ is demanded in the *rst
instance from one person with the
expectation that he can shift the burden to
someone else not as a tax but as a part of
the purchase price!
'irect Tax (s) In&irect Tax (21)
'istinguish direct taxes from indirect
taxes and give an
example for each
one! (:-)
SUGGESTED ANSWER)
'I>3(" ";@3/ are taxes wherein both
the incidence (or liability for the payment
of the tax) as well as the impact or
burden of the tax falls on the same person!
;n
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
9 of 73
example of this tax is income tax where the
person sub2ect
to tax cannot shift the burden of the tax
to another person!
I8'I>3(" ";@3/ on the other hand
are taxes wherein the incidence of or the
liability for the payment of the tax falls on
one person but the burden thereof can be
shifted or passed on to another person!
3xample of this tax is the value%added tax!
A+TERNATI1E ANSWER)
; direct tax is a tax which is demanded from
the person who also shoulders the burden of
the tax! 3xample: corporate and individual
income tax!
;n indirect tax is a tax which is
demanded from one person in the
expectation and intention that he shall
indemnify himself at the expense of another
and the burden *nally resting on the
ultimate purchaser or consumer! 3xample:
value added tax!
'irect Tax (s) In&irect Tax (26)
'istinguish "direct taxes" from "indirect
taxes!" .ive
examples!
(,-)
SUGGESTED ANSWER)
'I>3(" ";@3/ are demanded from the
very person who should pay the tax and
which he can not shift to another! ;n
I8'I>3(" ";@ is demanded from one
person with the expectation that he can
shift the burden to someone else not as a
tax but as part of the purchase price!
3xamples of direct taxes are the income tax
the estate tax and the donorBs tax! 3xamples
of indirect taxes are the value%added tax the
percentage tax and the excise tax on
exciseable articles!
'ou+"e Taxation (199,)
Is double taxation a valid defense against
the legality of a tax measure?
SUGGESTED ANSWER)
8o double taxation standing alone and not
being forbidden by our fundamental law is
not a valid defense against the legality of
a tax measure (Pe()! Co*a v. Ta+a,a+#
-% SCRA .-/'. ?owever if double
taxation amounts to a direct duplicate
taxation
4! in that the same sub2ect is taxed twice
when it should
be taxed but once
:! in a fashion that both taxes are imposed
for the same
purpose
+! by the same taxing authority within
the same
2urisdiction or taxing district
0! for the same taxable
period and
,! for the same #ind or
character of a tax
then it becomes legally
ob2ectionable for being oppressive and
ineDuitable!
'ou+"e Taxation: -#at !onstitutes 'T. (1996)
@ a lessor of a property pays real
estate tax on the
premises a real estate dealerBs tax based
on rental receipts
and income tax on the rentals! @ claims that
this is double taxation? 'ecide!
SUGGESTED ANSWER)
"here is no double taxation!
'OEA53
";@;"IO8 means taxing for the same tax
period the same thing or activity twice
when it should be taxed but once by the
same taxing authority for the same purpose
and with the same #ind or character of tax!
"he >3;5 3/";"3 ";@ is a tax on propertyC
the >3;5 3/";"3 '3;53>B/ ";@ is a tax on
the privilege to engage in businessC while
the I8(O<3 ";@ is a tax on the
privilege to earn an income! "hese taxes are
imposed by different taxing authorities and
are essentially of different #ind and
character (V!**a+0eva v). C!t1 o2 I*o!*o# 3-
SCRA
4&5
'.
'ou+"e Taxation$ In&irect 'up"icate Taxation (199,)
When an item of income is taxed in the
&hilippines and
the same income is taxed in another
country is there a case of double taxation?
SUGGESTED ANSWER)
7es but it is only a case of indirect duplicate
taxation which is not legally prohibited
because the taxes are imposed by different
taxing authorities!
'ou+"e Taxation$ /icense Fee (s) /oca" Tax (2*)
; municipality AA has an ordinance which
reDuires that all stores restaurants and
other establishments selling liDuor should
pay a *xed annual fee of &:1!111!
/ubseDuently the municipal board proposed
an ordinance imposing a sales tax eDuivalent
to ,- of the amount paid for the purchase
or consumption of liDuor in stores
restaurants and other establishments!
"he municipal mayor (( refused to sign
the ordinance on the ground that it would
constitute double taxation! Is the refusal of
the mayor 2usti*ed? >eason brie)y! (,-)
SUGGESTED ANSWER)
8o! "he refusal of the mayor is not 2usti*ed!
"he impositions are of diFerent nature
and character! "he *xed annual fee is in
the nature of a license fee imposed through
the exercise of police power while the ,-
tax on purchase or consumption is a local
tax imposed through the exercise of taxing
powers! Aoth a license fee and a tax may be
imposed on the same business or
occupation or for selling the same article
and this is not in violation of the rule
against double taxation GCa6(a+!a
Ge+ea* de Ta7aco) de F!*!(!+o) v. C!t1
o2 Ma+!*a# 5 SCRA 8-& 9$%-8:)!
'ou+"e Taxation$ 0et#o&s of A(oi&ing 'T (199,)
What are the usual methods of avoiding the
occurrence of
double
taxation?
SUGGESTED ANSWER)
"he usual methods of avoiding the
occurrence of double taxation are:
4! ;llowing reciprocal exemption either
by law or by treatyC
:! ;llowance of tax credit for foreign
taxes paidC
+! ;llowance of deduction for foreign
taxes paidC and
0! >eduction of the &hilippine
tax rate!
Note: Any three of the methods shall be
given full credit.
Imprescripti+i"ity of Tax /a1s (199,)
"axes were generally imprescriptibleC
statutes however may provide otherwise!
/tate the rules that have been adopted on
this score by %
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
10 of 73
(a) "he 8ational Internal
>evenue (odeC
(b) "he "ariF and (ustoms
(odeC and
(c) "he 5ocal .overnment (ode
;nswer:
SUGGESTED ANSWERS)
"he rules that have been adopted on
prescription are as follows:
(a) Nat!o+a* I+te+a* Reve+0e Code %
"he statute of
limitation for assessment of tax if a
return is *led is within three (+) years
from the last day prescribed by law for
the *ling of the return or if *led after
the last day within three years from
date of actual *ling! If no return is *led
or the return *led is false or fraudulent
the period to assess is within "38
73;>/ from discovery of the omission
fraud or falsity!
"he period to collect the tax is within
"?>33 73;>/ from date of assessment!
In the case however of omission to *le
or if the return *led is false or
fraudulent the period to collect is
within "38 73;>/ from discovery
without need of an assessment!
(b) Ta!; a+d C0)to6) Code % It does not
express any general statute of
limitationC it provided however that
"when articles have entered and passed
free of duty or *nal ad2ustment of duties
made with subseDuent delivery such
entry and passage free of duty or
settlement of duties will after the
expiration of O83 (4) 73;> from the
date of the *nal payment of duties in
the absence of fraud or protest be *nal
and conclusive upon all parties unless
the liDuidation of Import entry was
merely tentative" (/ec
4H1+
"(()!
(c) Loca* Gove+6e+t Code % 5ocal
taxes fees or charges shall be assessed
within II63 (,) 73;>/ from the date
they became due! In case of fraud or
intent to evade the payment of taxes
fees or charges the same maybe
assessed within "38 73;>/ from
discovery of the fraud or intent to evade
payment! "hey shall also be collected
either by administrative or 2udicial
action within II63 (,) 73;>/ from date
of assessment (/ec! 4J0 5.()!
Po1er of Taxation: 23ua" Protection of t#e /a1 (2)
;n 3xecutive Order was issued pursuant to
law granting
tax and duty incentives only to businesses
and residents within the "secured area" of the
/ubic 3conomic /pecial Kone and denying
said incentives to those who live within
the Kone but outside such "secured area"! Is
the constitutional right to eDual protection of
the law violated by the 3xecutive Order?
3xplain! (+-)
SUGGESTED ANSWER)
8o! 3Dual protection of the law clause is
sub2ect to reasonable classi*cation!
(lassi*cation to be valid must (4) rest on
substantial distinctions (:) be germane to the
purpose of the law (+) not be limited to
existing conditions only (0) apply eDually to
all members of the same class!
"here are substantial differences
between big
investors being enticed to the "secured
area" and the business operators outside
that are in accord with the eDual
protection clause that does not reDuire
territorial uniformity of laws! "he
classi*cation applies eDually to all the
resident individuals and businesses within
the "secured area"! "he residents being in
li#e circumstances to contributing directly
to the achievement of the end purpose
of the law are not categori$ed further!
Instead they are similarly treated both in
privileges granted and obligations
reDuired! (Tiu et al v. !ourt of "npeals et
al #.$. No. %&'"%( )anuary &( %***)
Po1er of Taxation: In#erent in a So(ereign State (24)
Why is the power to tax considered
inherent in a sovereign /tate? (0-)
SUGGESTED
ANSWER)
It is considered inherent in a sovereign
/tate because it is a necessary attribute of
sovereignty! +ithout this power no
sovereign ,tate can exist or endure! The
po w er to ta x procee d s upon the th eory
th at t h e e x is te nce o f a g o vernment is a
ne c essi ty and th is power is an essen tial
and inherent attribute of sovereignty
belonging as a matter of right to every
inde pe ndent st a te or government. 8o
sovereign state can continue to exist
without the means to pay its expensesC and
that for those means it has the right to
compel all citi$ens and property within its
limits to contribute hence the emergence
of the power to tax! (-%
Am.
)ur.Taxation
"().
Po1er of Taxation: /ega"ity$ /oca" 5o(6t Taxation (24)
<ay (ongress under the 4J=L
(onstitution abolish the power to tax of
local governments? (0-)
SUGGESTED
ANSWER)
8o! (ongress cannot abolish what is
expressly granted by the fundamental law!
"he only authority conferred to (ongress
is to provide the guidelines and
limitations on the local governmentBs
exercise of the power to tax (/ec!
, ;rt! @ 4J=L
(onstitution)!
Po1er of Taxation: /egis"ati(e in 7ature
(199*)
"he /ecretary of Iinance upon
recommendation of the
(ommissioner of Internal >evenue issued
a >evenue >egulation using gross income
as the tax base for corporations doing
business in the &hilippines! Is the >evenue
>egulation valid?
SUGGESTED ANSWER)
"he regulation establishing gross income
as the tax base for corporations doing
business in the &hilippines (domestic as
well as resident foreign) is not valid! "his
is no longer implementation of the law but
actually it constitutes legislation because
among the powers that are exclusively
within the legislative authority to tax is the
power to determine %the amount of the tax!
(,ee % !ooley
%'.-%/"). (ertainly if the tax is limited to
gross income without deductions of these
corporations this is changing the amount of
the tax as said amount ultimately depends
on the taxable base!
Po1er of Taxation: /imitations of t#e !ongress (21)
(ongress after much public hearing and
consultations with various sectors of
society came to the conclusion that it will
be good for the country to have only one
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
11 of 73
system of taxation by centrali$ing the
imposition and
collection of all taxes in the national
government! ;ccordingly it is thin#ing of
passing a law that would abolish the taxing
power of all local government units! In your
opinion would such a law be valid under the
present (onstitution? 3xplain your answer!
(,-)
SUGGESTED ANSWER)
8o! "he law centrali$ing the imposition and
collection of all taxes in the national
government would contravene the
(onstitution which mandates that: ! ! ! "3ach
local government unit shall have the power
to create their own sources of revenue and
to levy taxes fees and charges sub2ect to
such guidelines and limitations as (ongress
may provide consistent with the basic policy
of local autonomy!" It is clear that (ongress
can only give the guidelines and limitations
on the exercise by the local governments of
the power to tax but what was granted by
the fundamental law cannot be withdrawn
by (ongress!
Po1er of Taxation: /imitations: Passing of 8e(enue Bi""s
(199,)
"he ?ouse of >epresentatives introduced
?A L111 which
envisioned to levy a tax on various
transactions! ;fter the bill was approved by
the ?ouse the bill was sent to the /enate as
so reDuired by the (onstitution! In the upper
house instead of a deliberation on the
?ouse Aill the /enate introduced /A =111
which was its own version of the same tax!
"he /enate deliberated on this /enate Aill
and approved the same! "he ?ouse Aill
and the /enate Aill were then consolidated
in the Aicameral (ommittee! 3ventually the
consolidated bill was approved and sent to
the &resident who signed the same! "he
private sectors aFected by the new law
Duestioned the validity of the enactment on
the ground that the constitutional provision
reDuiring that all revenue bills should
originate from the ?ouse of >epresentatives
had been violated! >esolve the issue!
SUGGESTED ANSWER)
"here is no violation of the constitutional
reDuirement that all revenue bills should
originate from the ?ouse of
>epresentatives! What is prohibited is for
the /enate to enact revenue measures on its
own without a bill originating from the
?ouse! Aut once the revenue bill was passed
by the ?ouse and sent to the /enate the
latter can pass its own version on the
same sub2ect matter consonant with the
latterBs power to propose or concur with
amendments! "his follows from the co%
eDuality of the two chambers of (ongress
(To*e+t!+o v. Seceta1 o2 F!+a+ce# GR
No. $$4.44# Oct. 8/# $%%4)!
Po1er of Taxation: /imitations$ Po1er to 'estroy (2)
Mustice ?olmes once said: The power to tax
is not the power to destroy while this !ourt
(the ,upreme !ourt) sits.0 'escribe the
power to tax and its limitations! (,-)
SUGGESTED ANSWER)
"he power to tax is an inherent power of the
sovereign which is exercised through the
legislature to impose burdens upon sub2ects
and ob2ects within its Murisdiction for the
purpose of raising revenues to carry out the
legitimate ob2ects of government! "he
underlying basis for its exercise is
governmental necessity for without it no
government can exist nor endure!
;ccordingly it has the
broadest scope of all the powers of
government
because in the absence of limitations it is
considered as unlimited plenary
comprehensive and supreme! "he two
limitations on the power of taxation are the
inherent and constitutional limitations
which are intended to prevent abuse on the
exercise of the otherwise plenary and
unlimited power! It is the (ourtBs role to
see to it that the exercise of the power
does not transgress these limitations!
Po1er of Taxation: 8e(ocation of 2xempting
Statutes
(199
,)
"@" (orporation was the recipient in
4JJ1 of two tax
exemptions both from (ongress one law
exempting the
companyBs bond issues from taxes
and the other exempting the company
from taxes in the operation of its public
utilities! "he two laws extending the
tax exemptions were revo#ed by (ongress
before their expiry dates! Were the
revocations constitutional?
SUGGESTED
ANSWER)
7es! "he exempting statutes are both
granted unilaterally by (ongress in the
exercise of taxing powers! /ince taxation
is the rule and tax exemption the
exception any tax exemption unilaterally
granted can be withdrawn at the pleasure
of the taxing authority without violating
the (onstitution (Macta+ Ce70
I+te+at!o+a* A!(ot A0t<o!t1 v#
Maco)# G.R No. $3//53# Se(te67e
$$#
$%
%-
)!
8either of these were issued by the taxing
authority in a contract lawfully entered by
it so that their revocation would not
constitute an impairment of the obligations
of contracts!
A+TERNATI1E
ANSWER)
8o! "he withdrawal of the tax exemption
amounts to a deprivation of property
without due process of law hence
unconstitutional!
Po1er of Taxation$ In#erent in a So(ereign State (29)
'escribe the power of taxation! <ay a
legislative body enact laws to raise
revenues in the absence of a
constitutional provision granting said
body the power to tax? 3xplain!
SUGGESTED
ANSWER)
7es the legislative body may enact
laws even in the absence of a
constitutional provision because the power
to tax is inherent in the government and not
merely a constitutional grant! "he power of
taxation is an essential and inherent
attribute of sovereignty belonging as a
matter of right to every independent
government without being expressly
granted by the people! (Pe()!=Co*a
Bott*!+" Co6(a+1 o2 t<e P<!*!((!+e)#
I+c. v. M0+!c!(a*!t1 o2 Ta+a0a+# Le1te#
G.R. No. L=8$$4-# Fe70a1 3&#$%&-'
"axation is the inherent power of a /tate to
collect enforced proportional contribution
to support the expenses of government!
"axation is the power vested in the
legislature to impose burdens or charges
upon persons and property in order to
raise revenue for public purposes!
"he power to tax is so unlimited in force and
so searching in extent that courts
scarcely venture to declare it is
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
12 of 73
sub2ect to any restrictions whatever except
such as rest in
the discretion of the authority which
exercises it! (T!o v. V!deo"a6 Re"0*ato1
Boad# G.R. No. L=&4-%&# >0+e $5#
$%5&' /o potent is the power to tax that it
was once opined that "the power to tax
involves the power to destroy!" (C.>.
Ma)<a** !+ McC0**oc< v. Ma1*a+d# .
?<eat# 8$- . L. Ed. 4&%# -/&'
Po1er of Taxation$ /egis"ati(e in 7ature (1996)
What is the nature of the power of
taxation? SUGGESTED ANSWER)
"he &OW3> "O ";@ is an attribute of
sovereignty and is inherent in the /tate! It is
a power emanating from necessity because
it imposes a necessary burden to
preserve the /tateBs sovereignty (P<!*
G0aa+tee Co. v). Co66!))!o+e# L=
33/&.# A(!* 8/# $%-4'! It is inherently
legislative in nature and character in that
the power of taxation can only be
exercised through the enactment of law!
A+TERNATI1E ANSWER)
"he nature of the power of taxation refers to
its own limitations such as the reDuirement
that it should be for a public purpose that
it be legislative that it is territorial and
that it should be sub2ect to international
comity!
Purpose of Taxation$ Interpretation (2*)
Which of the following propositions
may now be
untena
ble:
4) "he court should construe a law
granting tax
exemption strictly against the taxpayer!
:) "he court should construe a law
granting a municipal
corporation the power to tax most
strictly!
+) "he (ourt of "ax ;ppeals has
2urisdiction over
decisions of the (ustoms
(ommissioner in cases involving
liability for customs duties!
0) "he (ourt of ;ppeals has 2urisdiction
to review decisions of the (ourt of "ax
;ppeals!
,) "he /upreme (ourt has 2urisdiction
to review decisions of the (ourt of
;ppeals!
Mustify your answer or choice
brie)y! (,-)
SUGGESTED ANSWER)
3! The court should construe a law granting
a municipal corporation the power to tax
most strictly.
"his proposition is now untenable! "he basic
rationale for the grant of tax power to local
government units is to safeguard their
viability and self%suFiciency by directly
granting them general and broad tax powers
(Ma+!*a E*ect!c Co6(a+1 v. Pov!+ce o2
La"0+a et. a*.# 8/- SCRA
&4/ 9$%%%:'! (onsidering that inasmuch as
the power to tax
may be exercised by local legislative bodies
no longer by valid congressional delegation
but by direct authority conferred by the
(onstitution in interpreting statutory
provisions on municipal fiscal powers doubts
will therefore have to be resolved in favor of
municipal corporations (C!t1 Gove+6e+t o2
Sa+ Pa7*o# La"0+a v. Re1e)# 8/4 SCRA
848 9$%%%:'. "his means that the court
must adopt a liberal construction of a
law granting a municipal corporation the
power to tax!
Note: If the examinee chose proposition
+o. . as his
answer it should be given full credit
considering that the present ("; ;ct
(>!;! 8o! J:=:) has made the ("; a
coeDual 2udicial body of the (ourt of
;ppeals! "he Duestion "Which of the
following propositions
may now be untenable"
may lead the
examinee to choose a proposition which
is untenable on the basis of the new
law despite the cut%oF date adopted by
the Aar 3xamination (ommittee! >!;!
8o!
J:=: was passed on
<arch +1 :110!
Purpose of Taxation$ /egis"ati(e in 7ature
(2*)
"axes are assessed for the purpose of
generating revenue
to be used for public needs! "axation
itself is the power
by which the /tate raises revenue to
defray the expenses of government! ;
2urist said that a tax is what we pay for
civili$ation!In our 2urisdiction which of the
following statements may be erroneous:
4) "axes are pecuniary
in nature!
:) "axes are enforced charges and
contributions!
+) "axes are imposed on persons and
property within the territorial
2urisdiction of a /tate!
0) "axes are levied by the executive
branch of the government!
,) "axes are assessed according to a
reasonable rule of apportionment!
Mustify your answer or choice
brie)y! (,-)
SUGGESTED
ANS?ER:
A. .. Taxes are levied by the
executive branch of government!
"his statement is erroneous because levy
refers to the act
of imposition by the legislature which is
done through the enactment of a tax law!
5evy is an exercise of the power to tax
which is exclusively legislative in nature
and character! (learly taxes are not levied
by the executive branch of government!
(>VPC v. A*7a1# $5- SCRA $%5 9$%%/:'.
8u"e on Set:%ff or !ompensation of Taxes
(1996)
@ is the owner of a residential lot
situated at Nuirino
;venue &asay (ity! "he lot has an area of
+11 sDuare meters! On Mune 4 4JJ0 411
sDuare meters of said lot owned by @ was
expropriated by the government to be used
in the widening of Nuirino ;venue for
&+11!111!11 representing the estimated
assessed value of said portion! Irom 4JJ4
to 4JJ, @ who is a businessman has
not been paying his income taxes! @ is now
being assessed for the unpaid income taxes
in the total amount of &4,1111!11! @
claims his income tax liability has already
been compensated by the amount of
&+11!111!11 which the government owes
him for the expropriation of his property!
'ecide!
SUGGESTED ANSWER)
"he income tax liability of @ can not be
compensated with the amount owed by the
.overnment as compensation for his
property expropriated taxes are of distinct
#ind essence and nature
than ordinary obligations! "axes and
debts cannot be the sub2ect of compensation
because the .overnment and @ are not
mutually creditors and debtors of each other
and a claim for taxes is not a debt demand
contract or Mudgment as is allowable to be
set oF! (Fa+c!a v). IAC. G.R &-&.%# >0+e
35.
$%55'
8u"e on Set:%ff or !ompensation of Taxes (21)
<ay a taxpayer who has pending claims
for 6;" input
credit or refund set%oF said claims against
his other tax liabilities? 3xplain your
answer! (,-)
SUGGESTED ANSWER)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
1* of 73
8o! /et%oF is available only if both
obligations are
liDuidated and demandable! 5iDuidated
debts are those where the exact amounts
have already been determined! In the
instant case the claim of the taxpayer for
6;" refund is still pending and the amount
has still to be determined! ; fortiori the
liDuidated obligation of the taxpayer to the
government can not therefore be set%oF
against the unliDuidated claim which
the taxpayer conceived to exist in his
favor! (P<!*e@ M!+!+" Co(. v. CIR# GR
No. $34&/.# A0"0)t 3%# $%%5)!
A+TERNATI1E ANSWER)
8o! "axes and claims for refund cannot be
the sub2ect of set%off for the simple reason
that the government and the taxpayer are
not creditors and debtors of each other!
"here is a material distinction between a
tax and a claim for refund! (laims for
refunds 2ust li#e debts are due from the
government in its corporate capacity while
taxes are due to the government in its
sovereign capacity! (P<!*e@ M!+!+" Co(.
v. CIR# GR No. $34&/.# A0"0)t 3%#
$%%
5)!
8u"e on Set:%ff or !ompensation of Taxes (29)
<ay taxes be the sub2ect of set%oF or
compensation?
3xplai
n!
SUGGESTED ANSWER5
8o taxes cannot be the sub2ect of
set%oF or compensation for the following
reasons:
4) "he lifeblood theory reDuires that there
should be no
unnecessary impediments to the
collection of taxes to ma#e available to the
government the wherewithal to meet its
legitimate ob2ectivesC and
:) "he payment of taxes is not a contractual
obligation but arises out of a duty to pay
and in respect of the positive acts of
government regarding the ma#ing and
enforcing of taxes the personal consent of
the individual taxpayer is not reDuired!
(Re(07*!c v. Ma670*ao L067e Co.# G.R.
No. L=$&&34# Fe70a1 35# $%-3A Ca*te@ v.
Co66!))!o+ o+ A0d!t# G.R. No. %3454#
Ma1 5# $%%3A a+d P<!*e@ v.
Co66!))!o+e o2 I+te+a* Reve+0e#
G.R. No. $34&/.# A0"0)t 35# $%%5'
?owever there is a possibility that set%oF
may arise if the claims against the
government have been recogni$ed and an
amount has already been appropriated
for that purpose! Where both claims have
already become overdue and demandable as
well as fully liDuidated! (ompensation ta#es
place by operation of law under ;rt! 4:11 in
relation to ;rticles 4:LJ and 4:J1 of the 8ew
(ivil (ode! (Do6!+"o v. Ga*!to)# G.R. No. L=
$5%%.# >0+e 3%# $%-8'
8u"e on Set:%ff or !ompensation on Taxes (29)
(an an assessment for a local tax be the
sub2ect of set%oF
or compensation against a final 2udgment
for a sum of
money obtained by the taxpayer
against the local government that made
the assessment? 3xplain! SUGGESTED ANSWER)
8o taxes cannot be the sub2ect of set%off
even when there is a *nal 2udgment for a
sum of money against the local
government ma#ing the
assessment! "he government
and the taxpayer are not the "mutual
creditors and debtors" of each other who can
avail of the remedy of compensation which
;rt! 4:L= ((ivil (ode) is
referring to Re(07*!c o2 t<e
P<!*!((!+e) v.
Ma670*ao L067e Co.# G.R. No. L=
$&&34# Fe70a1 35#
$%-3A a+d Fa+c!a v. I+te6ed!ate
A((e**ate Co0t# G.R.
No. L=-&-.%# >0+e
35#$%%5.
"here is however legal basis to state that
an assessment for a local tax may be the
sub2ect of set%oF or compensation against
a *nal 2udgment for a sum of money
obtained by the taxpayer against the local
government by operation of law where the
local government and the taxpayer are in
their own right reciprocally debtors and
creditors of each other and that the debts
are both due and demandable! "his is
consistent with the ruling in Do6!+"o v.
Ga*!to)# G.R. No. L=$5%%.# >0+e 3%#$%-8#
relying upon ;rts! 4:L= and 4:LJ of the
(ivil (ode where these provisions were
applied in relation to the national tax and
should therefore be applicable to a local
tax!
Tax A(oi&ance (s) Tax 2(asion (1996)
'istinguish tax evasion from tax
avoidance! SUGGESTED ANSWER)
"ax evasion is a scheme used outside
of those lawful means to escape tax
liability and when availed of it usually
sub2ects the taxpayer to further or
additional civil or criminal liabilities! "ax
avoidance on the other hand is a tax
saving device within the means sanctioned
by law hence legal!
Tax A(oi&ance (s) Tax 2(asion
(2)
<r! &ascualBs income from leasing his
property reaches the maximum rate of tax
under the law! ?e donated one% half of his
said property to a non%stoc# non%pro*t
educational institution whose income and
assets are actually directly and exclusively
used for educational purposes and
therefore Dualified for tax exemption under
;rticle @I6 /ection 0 (+) of the
(onstitution and /ection
+1 (h) of the "ax (ode! ?aving thus
transferred a portion
of his said asset <r! &ascual succeeded in
paying a lesser tax on the rental income
derived from his property! Is there tax
avoidance or tax evasion? 3xplain! (:-)
SUGGESTED ANSWER)
"here is tax avoidance! <r! &ascual has
exploited a fully permissive alternative
method to reduce his income tax by
transferring part of his rental income to
a tax exempt entity through a donation of
one%half of the income producing property!
"he donation is li#ewise exempt from the
donorBs tax! "he donation is the legal means
employed to transfer the incidence of
income tax on the rental income!
Tax 2xemptions: 7ature ; !o(erage$ Proper Party (2*)
;s an incentive for investors a law was
passed giving newly established
companies in certain economic $one
exemption from all taxes duties fees
imposts and other charges for a period
of three years! ;A( (orp! was organi$ed
and was granted such incentive! In the
course of business ;A( (orp! purchased
mechanical eDuipment from @7K Inc!
8ormally the sale is sub2ect to a sales tax!
@7K Inc! claims however that since
it sold the eDuipment to ;A( (orp!
which is tax exempt @7K
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
14 of 73
should not be liable to pay the sales tax!
Is this claim
tenable?
(,-)
SUGGESTED ANSWER)
;! 8o! 3xemption from taxes is personal in
nature and covers only taxes for which the
taxpayer%grantee is directly liable! "he
sales tax is a tax on the seller who is
not exempt from taxes! /ince @7K Inc! is
directly liable for the sales tax and no tax
exemption privilege is ever given to him
therefore its claim that the sale is tax
exempt is not tenable! ; tax exemption is
construed in strictissimi 1uris and it can not
be permitted to exist upon vague
implications (A)!at!c Peto*e06 Co.# Ltd. V.
L*a+e)# .% P<!*
.--
9$%3-:'.
;ssume arguendo that @7K had to and did
pay the sales tax! ;A( (orp! later found
out however that @7K merely shifted or
passed on to ;A( the amount of the sales
tax by increasing the purchase price! ;A(
(orp! now claims for a refund from the
Aureau of Internal >evenue in an amount
corresponding to the tax passed on to it
since it is tax exempt! Is the claim of ;A(
(orp! meritorious? (,-)
SUGGESTED ANSWER6
A! 8o! "he claim of ;A( (orp! is not
meritorious! ;lthough the tax was shifted to
;A( (orp! by the seller what is paid by it is
not a tax but part of the cost it has assumed!
?ence since ;A( (orp! is not a taxpayer it
has no capacity to *le a claim for refund!
"he taxpayer who can *le a claim for
refund is the person statutorily liable for
the payment of the tax!
Tax /a1s$ BI8 8u"ing$ 7on:8etroacti(ity of 8u"ings (2*)
'ue to an uncertainty whether or not a new
tax law is applicable to printing companies
'3I &rinters submitted a legal Duery to the
Aureau of Internal >evenue on that issue!
"he AI> issued a ruling that printing
companies are not covered by the new law!
>elying on this ruling '3I &rinters did not
pay said tax!
/ubseDuently however the AI> reversed the
ruling and issued a new one stating that the
tax covers printing companies! (ould the
AI> now assess '3I &rinters for bac# taxes
corresponding to the years before the new
ruling? >eason brie)y! (,-)
SUGGESTED ANSWER)
8o! >eversal of a ruling shall not be given a
retroactive application if said reversal will
be pre2udicial to the taxpayer! "herefore
the AI> can not assess '3I printers for
bac# taxes because it would be violative
of the principle of non%retroactivity of
rulings and doing so would result in grave
in2ustice to the taxpayer who relied on the
*rst ruling in good faith (Sect!o+ 3.-# NIRCA
CIR v. B0o0"<)# I+c.# $.3 SCRA
83.9$%5-:'.
Tax Pyrami&ing$ 'efinition ; /ega"ity (26)
What is tax pyramiding? What is its basis
in law? (,-)
SUGGESTED ANSWER)
"ax &yramiding is the imposition of a tax
upon another tax! It has no basis in fact or
in law (Peo(*e v. Sa+d!"a+7a1a+# G.R. No.
$43483# A0"0)t $-# 3//4'. "here is also tax
pyramiding when sales taxes are
incorrectly applied to goods several times
from production to *nal
sale thus shifting the tax burden
to the ultimate
consu
mer!
(NOTABENE: This concept pertains to the
2AT law which is
excluded from the bar coverage #uidelines for
&((. 3ar 4xaminations
)une %-
&((.)
Taxpayer Suit$ -#en A""o1e& (1996)
When may a taxpayerBs suit
be allowed? SUGGESTED
ANS?ER:
; taxpayerBs suit may only be allowed
when an act
complained of which may include a
legislative enactment directly involves the
illegal disbursement of public funds
derived from taxation (Pa)c0a* v).
Seceta1 o2 P07*!c ?oB)# $$/ P<!*.
88$)!
<niformity in t#e !o""ection of Taxes
(199=)
3xplain the reDuirement of uniformity as
a limitation in the imposition andOor
collection of taxes! (,-P SUGGESTED ANSWER)
Eniformity in the imposition andOor
collection of taxes means that all taxable
articles or #inds of property of the same
class shall be taxed at the same
rate! "he reDuirement of uniformity is
complied with when the tax operates with
the same force and effect in every place
where the sub2ect of it is found
(C<0c<!** C Ta!* v. Co+ce(t!o+# 8. P<!*.
%-%'! It does not mean that lands
chattels securities income
occupations franchises privileges
necessities and luxuries shall be assessed
at the same rate! 'ifferent articles
maybe taxed at different amounts
provided that the rate is uniform on the
same class everywhere with all people at
all times! ;ccordingly singling out one
particular class for taxation purposes
does not infringe the reDuirement of
uniformity!
FIRST ALTERNATIVE
ANS?ER:
"he criteria is met when the tax laws
operate eDually and uniformly on all
persons under similar circumstances! ;ll
persons are treated in the same manner
the conditions not being diFerent both in
privileges conferred and liabilities
imposed! Eniformity in taxation also refers
to geographical uniformity! Iavoritism and
preference is not allowed!
SECOND ALTERNATIVE
ANS?ER:
; tax is deemed to have satisfied the
uniformity rule when it operates with the
same force and effect in every place where
the sub2ect maybe found! (P<!*. T0)t C
Co. v. Datco# -% P<!*. .3/'.
INCOME TAXATION
Basic: A""o1a+"e 'e&uctions (s) Persona" 2xemptions
(21)
'istinguish ;llowable 'eductions
from &ersonal
3xemptions! .ive an example of an
allowable deduction and another example
for personal exemption! (,-) SUGGESTED
ANSWER)
"he distinction between allowable
deductions and personal exemptions are as
follows:
a! A) to a6o0+t 9 ;llowable
deductions generally
refer to actual expenses incurred in the
pursuit of
trade business or practice of
profession while
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
1. of 73
personal exemptions are arbitrary
amounts allowed
by law!
b! A) to +at0e 9 ;llowable
deductions constitute
business expenses while personal
exemptions
pertain to personal expenses!
c! A) to (0(o)e 9 'eductions are
allowed to
enable the taxpayer to recoup his
cost of doing
business while personal exemptions
are allowed to cover personal family
and living expenses!
d! A) to c*a!6a+t) 9 ;llowable
deductions can be
claimed by all taxpayers corporate
or otherwise
while personal exemptions can be
claimed only by individual taxpayers!
Basic: 0eaning of Taxa+"e Income (2)
What is meant by taxable
income? (:-) SUGGESTED
ANSWER)
";@;A53 I8(O<3 means the pertinent
items of gross income specified in the "ax
(ode less the deductions andOor personal
and additional exemptions if any authori$ed
for such types of income by the "ax (ode or
other special laws! (,ec. 5% N6$! of %**')
Basic: Princip"e of Mobilia Sequuntur Personam (199*)
What is the principle of mobilia
se7uuntur personam in income taxation?
SUGGESTED ANSWER)
&rinciple of 8obilia ,e7uuntur 9ersonam in
income taxation refers to the principle that
taxation follows the property or person who
shall be sub2ect to the tax!
Basic: Proper A""o1ance of 'epreciation (199=)
:! What is the proper allowance for
depreciation of any property used in
trade or business? Q+-)
+! What is the annual depreciation of a
depreciable *xed asset with a cost of
&411111 and an estimated useful life of
:1 years and salvage value of & 41111
after its useful life?
SUGGESTED ANSWER)
4! "he (o(e a**o,a+ce o2
de(ec!at!o+ of any
property used in trade or business refers
to the reason%
able allowance for the exhaustion wear
and tear (includ- ing reasonable
allowance for obsolescence) of said
property! "he reasonable allowance shall
include but not limited to an allowance
computed under any of the following
methods:
(a) straight%line methodC
(b) declining%balance methodC
(c) sum%of%years%digit methodC and
(d) any other method which may be
prescribed by the /ecretary
of Iinance upon
recommendation of the
(ommissioner of Internal >evenue
(/ec! +0(I)! 8I>()!
:! "he annual depreciation of the
depreciable *xed asset may be computed
on the straight%line method which will
allow the taxpayer to deduct an annual
depre% ciation of &hp0,11 arrived at by
dividing the depreciable
value (&hp l11!111%&hpl1!111)
of &hpJ1111 by the estimated
useful life (:1 years)!
NOTE: "he bar candidate may give a different
*gure depending on the method he used in
computing the annual depreciation!
"he facts given in the problem are
suFicient to
compute the annual depreciation either under
the declining% balance method or sum%of%
years%digit method! ;ny answer arrived at
by using any of the recogni$ed methods
should be given full credit! It is suggested
that no Duestion reDuiring computation
should be given in future bar examinations!
Basic: Sources of Income: Taxa+"e Income
(199=)
Irom what sources of income are the
following personsOcorporations taxable
by the &hilippine
government?
:) (iti$en of the &hilippines residing
thereinC Q4-R
+) 8on%resident
citi$enC Q4-4
0) ;n individual citi$en of the
&hilippines who is
wor#ing and deriving income from
abroad as an overseas contract
wor#erC Q4-R
,) ;n alien individual whether a resident
or not of the
&hilippinesC
Q4-R
H) ; domestic
corporationC Q4-R
SUGGESTED ANSWER) (/ection :+ 8I>(
of 4JJL)
4) ; citi$en of the &hilippines
residing therein is taxable on all
income derived from sources within
and without the &hilippines!
:) ; nonresident citi$en is taxable
only on income
derived from sources within the
&hilippines!
+) ;n individual citi$en of the
&hilippines who is
wor#ing and deriving income from
abroad as an overseas contract wor#er
is taxable only on income from sources
within the &hilippines!
0) ;n alien individual whether a resident
or not of the
&hilippines is taxable only on income
derived from sources within the
&hilippines!
,) ; domestic corporation is taxable
on all income derived from sources
within and without the &hilippines!
Basic: Tax Benefit 8u"e
(24)
(a) What is meant by the "tax
bene*t rule"?
SUGGESTED
ANSWER)
(a) ";@ A383II" >E53 states that the
taxpayer is obliged to declare as taxable
income subseDuent recovery of bad debts
in the year they were collected to the
extent of the tax bene*t en2oyed by the
taxpayer when the bad debts were written%
off and claimed as a deduction from income!
It also applies to taxes previously deducted
from gross income but which were
subseDuently refunded or credited! "he
taxpayer is also reDuired to report as
taxable income the subseDuent tax refund or
tax credit granted to the extent of the tax
benefit the taxpayer en2oyed when such
taxes were previously claimed as deduction
from income!
(b) .ive an illustration of the application
of the tax benefit rule!
SUGGESTED ANSWER)
(b) @ (ompany has a business connected
receivable amounting to &411111!11 from 7
who was declared ban#rupt by a competent
court! 'espite earnest efforts to collect the
same 7 was not able to pay prompting @
(ompany to write%oF the entire liability!
'uring the year of write%off the entire
amount was claimed as a deduction for
income tax purposes reducing the taxable
net income of @ (ompany to only
&4111111!11! "hree years later 7
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
16 of 73
voluntarily paid his obligation previously
written%oF to @
(ompany! In the year of recovery the entire
amount constitutes part of gross income of
@ (ompany because it was able to get full
tax bene*t three years earlier!
Basic$ Basis of Income Tax (1996)
@ is employed as a driver of a
corporate lawyer and
receives a monthly salary of &,111!11 with
free board and lodging with an eDuivalent
value of &4,11!11!
4! What will be the basis of @Bs
income tax? Why
:! Will your answer in Duestion (a) be the
same if @Bs
employer is an obstetrician? Why?
SUGGESTED ANSWERS)
4) "he basis of @Ss income tax would
depend on whether his employer is an
employee or a practicing corporate lawyer!
If his employer is an employee the
basis of @Bs income tax is &H,11!11
eDuivalent to the total of the basic salary
and the value of the board and lodging!
"his is so because the
employerOcorporate lawyer has no place
of business where the free board and
lodging may be given!
On the other hand if the corporate
lawyer is a "practicing lawyer (self%
employed) @ should be taxed only on
&,111!11 provided that the free board
and lodging is given in the business
premises of the lawyer and for his
convenience and that the free lodging
was given to @ as a condition for
employment!
:) If the employer is an obstetrician who
is self%em% ployed the basis of @Bs income
will only be &,111!11 if it is proven that the
free board and lodging is given within the
business premises of said employer
for his convenience and that the free
lodging is reDuired to be accepted by @ as
condition for employment! Otherwise @
would be taxed on &H,11!11!
Basic$ 5ross Income: 'efine (1999)
What is "gross Income" for purposes of the
Income tax?
SUGGESTED ANSWER)
.>O// I8(O<3 means all income from
whatever source derived including
(but not limited to)
compensation for services including fees
commissions and similar itemsC gross
income from businessC gains derived from
dealings in propertyC interestC rentsC
royaltiesC dividendsC annuitiesC pri$es and
winningsC pensionsC and partnerBs
distributive share of the gross income of
general professional partnership (/ec! :=
8I>()!
A+TERNATI1E ANSWER)
a) .ross income means all wealth which
)ows into the taxpayer other than as a mere
return of capital! It includes the forms of
income speci*cally described as gains and
pro*ts including gains derived from the sale
or other disposition of capital!
b) .ross income means income (in the broad
sense) less income which is by statutory
provision or otherwise exempt from the tax
imposed by law (/ec! +H >ev! >eg! 8o! :)!
.ross income from business means total
sales less cost of goods sold plus any income
from investments
and from incidental or outside
operations or
sources (/ec! 0+ >ev!
>eg! 8o! :)!
Basic$ Income (s) !apita"
(1999)
?ow does "Income" diFer from
"capital"? 3xplain!
SUGGESTED
ANSWER)
Income differs from capital in that
I8(O<3 is any wealth which flows into
the taxpayer other than a return of capital
while capital constitutes the investment
which is the source of income!
"herefore capital is fund while income is
the )ow! (apital is wealth while income is
the service of wealth! (apital is the tree
while income is the fruit (V!ce+te Mad!"a*
et a* v. >a6e) RE;et1# 85 P<!*. .$.)!
Basic$ Sc#e&u"ar Treatment (s) 5"o+a" Treatment (199*)
'istinguish "schedular treatment" from
"global treatment" as used in income
taxation!
SUGGESTED
ANSWER)
Ender a /(?3'E53> /7/"3< the
various typesOitems of income
(compensation: business;professional
income) are classi*ed accordingly and
are accorded different tax treatments in
accordance with schedules characteri$ed
by graduated tax rates! /ince these types
of income are treated separately the
allowable deductions shall li#ewise vary
for each type of income!
Ender the .5OA;5 /7/"3< all income
received by the taxpayer are grouped
together without any distinction as to the
type or nature of the income and after
deducting therefrom expenses and other
allowable deductions are sub2ected to tax
at a fixed rate!
!ompensation$ Income Tax: 'ue to Profita+"e
Business
'ea"
(1999)
<r! Osorio a ban# executive while
playing golf with <r!
&ere$ a manufacturing *rm executive
mentioned to the latter that his (Osorio)
ban# had 2ust opened a business
relationship with a big foreign importer of
goods which &ere$B company
manufactures! &ere$ reDuested Osorio to
introduce him to this foreign importer and
put in a good word for him (&ere$) which
Osorio did! ;s a result &ere$ was able to
ma#e a profitable business deal with
the foreign Importer!
In gratitude &ere$ in behalf of his
manufacturing *rm sent Osorio an
expensive car as a gift! Osorio called &ere$
and told him that there was really no
obligation on the part of &ere$ or his
company to give such an expensive gift!
Aut &ere$ insisted that Osorio #eep the car!
"he company of &ere$ deducted the cost of
the car as a business expense!
"he (ommissioner of Internal >evenue
included the fair mar#et value of the car
as Income of Osorio who protested that
the car was a gift and therefore excluded
from income! Who is correct the
(ommissioner or Osorio? 3xplain!
SUGGESTED ANSWER)
"he (ommissioner is correct! "he car
having been given to <r! Osorio in
consideration of having introduced <r!
&ere$ to a foreign Importer which resulted
to a profitable business deal is considered
to be a compensation for
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
12 of 73
services rendered! "he transfer is not a
gift because it is
not made out of a detached or disinterested
generosity but for a bene*t accruing to <r!
&ere$! "he fact that the company of <r!
&ere$ ta#es a business deduction for the
payment indicates that it was considered as
a pay rather than a gift! ?ence the fair
mar#et value of the car is includable in the
gross income pursuant to /ection :=(a)(l) of
the "ax (ode (,ee %*'" <ederal Tax
=andboo> p. %"-). ; payment though
voluntary if it is in return for services
rendered or proceeds from the constraining
force of any moral or legal duty or a benefit
to the payer is anticipated is a taxable
income to the payee even if characteri$ed
as a
BgiftB by the payor (Co66!))!o+e v).
D07e)te!+# 8-8 U.S.
3&
5'.
A+TERNATI1E ANSWER)
<r! Osorio is correct! "he car was not
payment for services rendered! "here was
no prior agreement or negotiations between
<r! Osorio and <r! &ere$ that the former
will be compensated for his services! <r!
&ere$ in behalf of his company gave the car
to <r! Osorio out of gratitude! "he transfer
having been made gratuitously should be
treated as a gift sub2ect to donorBs tax
and should be excluded from the gross
income of the recipient <r! Osorio! "he
(ommissioner should cancel the
assessment of deficiency income tax to
<r! Osorio and instead assess deficiency
donorBs tax on <r &ere$B company!
(/ec! :=(b)(+)8I>(C P!ova+o
v). Co66!))!o+e)
!orporate: Income: 'onor6s tax$ Tax /ia+i"ity (1996)
@ a multinational corporation doing
business in the
&hilippines donated 411 shares of
stoc# of said corporation to <r! 7 its
resident manager in the &hilippines!
4) What is the tax liability if any of @
corporation?
:) ;ssuming the shares of stoc#s were
given to <r! 7 in consideration of his
services to the corporation what are
the tax implications? 3xplain!
SUGGESTED ANSWERS)
4) Ioreign corporations effecting a
donation are sub2ect to donorBs tax only if
the property donated is located in the
&hilippines! ;ccordingly donation of a
foreign corporation of its own shares of
stoc#s in favor of resident employee is
not sub2ect to donorBs tax (AI> >uling 8o!
14=%=L Manuary :H 4J=L)! ?owever if
=,- of the business of the foreign
corporation is located in the &hilippines or
the shares donated have acDuired business
situs in the &hilippines the donation may be
taxed in the &hilippines sub2ect to the rule of
reciprocity!
:) If the shares of stoc#s were given to
<r! 7 in consideration of his services to the
corporation the same shall constitute taxable
compensation income to the recipient
because it is a compensation for services
rendered under an employer%employee
relationship hence sub2ect to income tax!
"he par value or stated value of the shares
issued also constitutes deductible expense
to the corporation provided it is sub2ected
to withholding tax on wages!
!orporate$ Income Tax$ 8easona+"eness of
t#e
Bonus
(26)
.old and /ilver (orporation gave extra
40th month
bonus to all its oFicials and employees in
the total amount
of &L, <illion! When it *led its corporate
income tax return the following year the
corporation declared a net operating loss!
When the income tax return of the
corporation was reviewed by the AI> the
following year it disallowed as item of
deduction the &L, <illion bonus the
corporation gave its oFicials and
employees on the ground of
unreasonableness! "he corporation claimed
that the bonus is an ordinary and
necessary expense that should be
allowed! If you were the AI>
(ommissioner how will you resolve the
issue? (,-)
SUGGESTED
ANSWER)
I will disallow the expense! ; bonus is
ordinary and necessary where said
expenditure is (4) appropriate and helpful
in the development of the taxpayers
business (8artens ?aw of <ederal 6ncome
Taxation 2olume 62 p. 5%-) and (:) is
normal in relation to the business of
the taxpayer and the surrounding
circumstances (p. 5%. 6bid).
"o determine the reasonableness of the
bonus it must be commensurate with
services performed by the of*cials and
employees! Other factors to consider are
whether the payment was made in good
faithC the character of the taxpayerBs
businessC the volume and amount of its net
earningsC its localityC the type and extent of
the services renderedC the salary policy of
the corporationC the si$e of the particular
businessC the employeesB Duali*cation and
contributions to the business ventureC and
general economic conditions (At*a)
M!+!+" v. CIR# G.R. No. L=
3-%$$# >a+0a1 3&# $%5$'! ?owever
since the business suFers from a net
operating loss I will rule that the bonus
is an unreasonable
expense!
!orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (199*)
(aledonia ;ircargo is an off%line
international carrier without any )ight
operations in the &hilippines! It has
however a liaison oFice in the &hilippines
which is duly licensed with the /ecurities
and 3xchange (ommission established
for the purpose of providing passenger
and )ight information reservation and
tic#eting services!
;re the revenues of (aledonia ;ircargo
from tic#ets reserved by its &hilippine
oFice sub2ect to tax? SUGGESTED ANSWER)
"he revenues in the &hilippines of (aledonia
;ircargo as an "oF%line" airline from tic#et
reservation services are taxable income
from "whatever source" under /ec! :=(a) of
the "ax (ode! "his case is analogous to
Co66!))!o+e v. BOAC# G.R No. No.
-4&&8=&.# A(!* 8/# $%5& where the
/upreme (ourt ruled that the income
received in the &hilippines from the sale of
tic#ets by an "off%line" airline is taxable as
income from whatever source!
!orporate$ Income: !o(erage$ >%ff:/ine> Air"ine (29)
;n international airline with no landing
rights in the &hilippines sold tic#ets in the
&hilippines for air transportation! Is
income derived from such sales of tic#ets
considered taxable income of the said
international
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
14 of 73
air carrier from &hilippine sources under
the "ax (ode?
3xplain!
(,-)
A+TERNATI1E ANSWER)
7es! "he income derived from the sales of
tic#ets in the &hilippines is considered
taxable income of the international air
carrier from &hilippine sources!
"he source of income is the property
activity or service that produced the
income! "he sale of tic#ets in the &hilippines
is the activity that produces the income! "he
absence of landing rights in the
&hilippines cannot alter the fact that
revenues were derived from tic#et sales
within the &hilippines! (Co66!))!o+e o2
I+te+a* Reve+0e v. >a(a+ A! L!+e)#
G.R. No. -/&$.# Octo7e .# $%%$
e!teat!+" B!t!)< Ove)ea) A!,a1)
Co(.# A! I+d!a a+d A6e!ca+ A!*!+e)#
I+c.'
A+TERNATI1E ANSWER)
8o under ,ec. 5 of $.$. No. %--&((& an oF%
line airline having a branch oFice or a sales
agent in the &hilippines which sells passage
documents for compensation or commission
to cover oF%line )ights of its principal or
head oFice or for other airlines
covering )ights originating from &hilippine
ports or oF%line )ights is not considered
engaged in business as an international air
carrier in the &hilippines and is therefore
not sub2ect to .ross &hilippine Aillings "ax
nor to the +- common carrierBs tax!
Aased on the foregoing the international
airline company is not considered as
engaged in business in the &hilippines and
is therefore a non%resident foreign
corporation! ; non%resident foreign
corporation is sub2ect to the gross income
tax on its income derived from sources
within the &hilippines! "he income from
sale of tic#ets shall not form part of
taxable income because the term "taxable
income" as defined under /ec! +4 of the
8I>( refers only to income of those
taxpayers who pay by way of the net income
tax! "axable income means the pertinent
items of gross income specified in the 8I>(
less the deductions andOor personal and
additional exemptions if any authori$ed for
such types of income by the 8I>( or
other special laws!
'i(i&en&s: 'isguise& &i(i&en&s (199*)
'isguised dividends in income taxation?
.ive an example!
SUGGESTED ANSWER)
'isguised dividends are those income
payments made by a domestic corporation
which is a subsidiary of a non% resident
foreign corporation to the latter ostensibly
for services rendered by the latter to the
former but which payments are
disproportionately larger than the actual
value of the services 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 sub2ected to the
corresponding tax of +,- on &hilippine
sourced gross income or such other
preferential rate as may be provided under a
corresponding "ax "reaty!
E@a6(*e: >oyalty payments under a
corresponding
licensing
agreement!
'i(i&en&s$ Income Tax$ 'e&ucti+"e 5ross Income (1999)
; (o! a &hilippine corporation issued
preferred shares of stoc# with the following
features:
4) 8on%
votingC
:) &referred and cumulative dividends
at the rate of
41- per annum whether or not in
any period the
amount is covered by earnings
or pro2ectsC
+) In the event of dissolution of the
issuer holders of
preferred stoc# shall be paid in full or
ratably as the assets of the issuer may
permit before any distribution shall be
made to common stoc#holdersC and
0) "he issuer has the option to redeem
the preferred stoc#!
; (o! declared dividends on the
preferred stoc# and claimed the
dividends as interests deductible from
its gross Income for income tax
purposes! "he AI> disallowed the
deduction! ; (o! maintains that the
preferred shares with their features are
really debt and therefore the dividends
are realty interests! 'ecide! (41-)
SUGGESTED ANSWER)
"he dividends are not deductible from
gross income! &referred shares shall be
considered capital regardless of the
conditions under which such shares are
issued and therefore dividends paid
thereon are not considered
BinterestB which are allowed to be deducted
from the gross income of the corporation!
($evenue 8emorandum !ircular No. %'-
'% )uly %& %*'%).
2ffect$ !on&onation of /oan in Taxation
(1999)
<r! Irancisco borrowed &41111!11 from
his friend <r!
.utierre$ payable in one year without
interest! When the loan became due <r!
Irancisco told <r! .utierre$ that he (<r!
Irancisco) was unable to pay because of
business reverses! <r! .utierre$ too# pity
on <r! Irancisco and condoned the loan!
<r! Irancisco was solvent at the time he
borrowed the & 41111!11 and at the time
the loan was condoned! 'id <r! Irancisco
derive any income from the cancellation or
condonation of his indebtedness? 3xplain!
SUGGESTED ANSWER)
8o <r! Irancisco did not derive any
income from the cancellation or
condonation of his indebtedness! /ince it is
obvious that the creditor merely desired to
benefit the debtor in view of the absence of
consideration for the cancellation the
amount of the debt is considered as a gift
from the creditor to the debtor and need
not be included in the latterBs gross
income!
Fringe Benefit Tax: !o(ere& 2mp"oyees (21)
@ was hired by 7 to watch over 6Ss
*shponds with a
salary of &hp 41111!11! "o enable him to
perform his duties well he was also
provided a small hut which he could use as
his residence in the middle of the
*shponds! Is the fair mar#et value of the use
of the small hut by @ a "fringe bene*t" that
is sub2ect to the +:- tax imposed by /ection
++ of the 8ational Internal >evenue
(ode? 3xplain your answer! (,-)
SUGGESTED ANSWER)
8o! @ is neither a managerial nor a
supervisory employee! Only managerial or
supervisory employees are entitled to a
fringe benefit sub2ect to the fringe bene*ts
tax! 3ven assuming that he is a managerial
or supervisory employee the small hut is
provided for the convenience of the
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
19 of 73
employer hence does not constitute a
taxable fringe
benefit! (,ection 55
N4$!).
Fringe Benefit Tax: 2mp"oyer re3uire& to Pay (24)
; "fringe bene*t" is de*ned as being any
good service or
other benefit furnished or granted in cash or
in #ind by an employer to an individual
employee! Would it be the employer or the
employee who is legally reDuired to pay an
income tax on it? 3xplain! (0-)
SUGGESTED ANSWER)
It is the employer who is legally reDuired to
pay an income tax on the fringe bene*t! "he
fringe bene*t tax is imposed as a II8;5
WI"??O5'I8. ";@ placing the legal
obligation to remit the tax on the employer
such that if the tax is not paid the legal
recourse of the AI> is to go after the
employer! ;ny amount or value received by
the employee as a fringe bene*t is
considered tax paid hence net of the
income tax due thereon! "he person who is
legally reDuired to pay (same as statutory
incidence as distinguished from economic
incidence) is that person who in case of
non%payment can be legally demanded to
pay the tax!
Interest: 'eficiency Interest: &efine (1999 Bar)
What is a "deficiency interest" for purposes
of the income
tax?
Illustrate!
SUGGESTED ANSWER)
'3II(I38(7 I8"3>3/" for purposes of the
income tax is the interest due on any
amount of tax due or installment thereof
which is not paid on or before the date
prescribed for its payment computed at
the rate of :1- per annum or the <anila
>eference >ate whichever is higher from
the date prescribed for its payment until it
is fully paid!
If for example after the audit of the boo#s of
@7K (orp! for taxable year 4JJ+ there was
found to be due a deficiency income tax of
&4:,111!11 inclusive of the :,- surcharge
imposed under /ection :0= of the "ax
(ode the interest will be computed on the
&4:,!111!11 from ;pril 4, 4JJ0 up to its
date of payment!
Interest: 'e"in3uency Interest: &efine (1999)
What is a "delinDuency interest" for
purposes of the
income tax?
Illustrate!
SUGGESTED ANSWER)
'elinDuency interest is the interest of :1-
or the <anila >eference >ate whichever is
higher reDuired to be paid in case of failure
to pay:
(a) the amount of the tax due on any return
reDuired to be *ledC or
(b) the amount of the tax due for which
return is reDuiredC or
(c) the deficiency tax or any surcharge
or interest thereon on the due date
appearing in the notice and demand of the
(ommissioner of Internal >evenue!
If in the above illustration the assessment
notice was released on 'ecember +4 4JJ0
and the amount of deficiency tax inclusive
of surcharge and deficiency interest were
computed up to Manuary +1 4JJ, which is
the due date for payment per assessment
notice failure to
pay on this latter date will
render the tax
delinDuent and will reDuire the payment of
delinDuency interest!
IT8: Persona" Income$ 2xempte& to Fi"e IT8
(199,)
; bachelor was employed by (orporation
; on the *rst wor#ing day of Manuary
4JJH on a part%time basis with a salary of
&+,11!11 a month! ?e then received the
4+th month pay! In /eptember 4JJH he
accepted another part% time Mob from
(orporation A from which he received a
total compensation of &40,11!11 for the
year 4JJH! "he correct total taxes were
withheld from both earnings! With the
withholding taxes already paid would he
still be reDuired to *le an income tax
return for his 4JJH income? SUGGESTED
ANSWER)
7es because what is exempt from *ling are
those individuals who have total
compensation income not exceeding
&H1!111 with the taxes correctly withheld
only by one employer! In this case even if
his aggregate compensation income from
both his employers does not exceed
&H1!111 and that total withholding taxes
were correctly withheld by his
employers the fact that he derives
compensation income concurrently from
two employers at anytime during the
taxable year does not exempt him from
*ling his income tax return ($A '"*' as
implemented by $$ No. "-*5).
IT8$ 'omestic !orporate Taxation
(199,)
'uring the year a domestic
corporation derived the
following items of revenue: (a) gross
receipts from a
trading businessC (b) interests from money
placements in the ban#sC (c) dividends
from its stoc# investments in domestic
corporationsC (d) gains from stoc#
transactions through the &hilippine
/toc# 3xchangeC (e) proceeds under an
insurance policy on the loss of goods! In
preparing the corporate income tax return
what should be the tax treatment on each
of the above items?
SUGGESTED
ANSWER)
"he "o)) ece!(t) 2o6 tad!+"
70)!+e)) is includible
as an item of income in the corporate
income tax return
and sub2ect to corporate income tax rate
based on net income!
"he other items of revenue will not be
included in the corporate income tax
return!
T "he interest from money mar#et
placements is
sub2ect to a *nal withholding tax of :1-C
T "he dividends from domestic corporation
are exempt
from income taxC and
T gains from stoc# transactions with
the &hilippine
/toc# 3xchange are sub2ect to
transaction tax which is in lieu of the
income tax!
T "he proceeds under an insurance policy
on the loss
of goods is not an item of income but
merely a return of capital hence not
taxable!
A+TERNATI1E ANSWER)
"he gross receipts from trading business is
includible as an item of income in the
corporate income tax return! 5i#ewise the
gain or loss reali$ed as a conseDuence of the
receipt of proceeds under an insurance
policy on the loss of goods will be
included in the corporate income tax
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
20 of 73
return either as a taxable gain or a
deductible loss! "he
gain or loss is arrived at by deducting from
the proceeds of insurance (amount reali$ed)
the basis of the good lost (/ec! +0(a)
8I>()! "he net income of the corporation
shall be sub2ect to corporate income tax rate
of +,-!
"he other items of revenue will not be
included in the corporate income tax return!
"he interest from money mar#et placements
is sub2ect to a *nal withholding tax of
:1-C dividends from domestic corporations
are exempt from income taxC and gains from
stoc# transactions with the &hilippine /toc#
3xchange are sub2ect to transaction tax
which is in lieu of the income tax!
IT8$ 'omestic !orporate Taxation (21)
a) ?ow often does a domestic corporation
*le income tax return for income earned
during a single taxable year? 3xplain the
process! (+-)
SUGGESTED ANSWER)
a) ; domestic corporation is reDuired to
*le income tax returns four (0) times for
income earned during a single taxable year!
Nuarterly returns are reDuired to be *led for
the first three Duarters where the
corporation shall declare its Duarterly
summary of gross income and deductions
on a cumulative basis! (,ection '- N6$!)!
"hen a *nal ad2ustment return is reDuired
to be *led covering the total taxable income
for the entire year calendar or *scal!
(,ection '. N6$!)!
b) What is the reason for such
procedure? (:-)
SUGGESTED ANSWER)
b) "he reason for this procedure is to
ensure the timeliness of collection to meet
the budgetary needs of the government!
5i#ewise it is designed to ease the burden
on the taxpayer by providing it with an
installment payment scheme rather than
reDuiring the payment of the tax on a lump%
sum basis after the end of the year!
A+TERNATI1E ANSWER)
b) "he reason for the Duarterly *ling of tax
returns is to allow partial collection of the
tax before the end of the taxable year and
also to improve the liDuidity of government
IT8$ Persona" Income: T1o 2mp"oyment (21)
In the year :111 @ wor#ed part time as a
waitress in a
restaurant in <ega <all from =:11 a!m! to
0:11 p!m! and then as a cashier in a :0%hour
convenience store in her neighborhood! "he
total income of @ for the year from the two
employers does not exceed her total
personal and additional exemptions for the
year :111! Was she reDuired to *le an
income tax return last ;pril? 3xplain your
answer! (,-)
SUGGESTED ANSWER)
7es! ;n individual deriving compensation
concurrently from two or more employers
at any time during the taxable year shall
*le an income tax return (/ec!
,4(;)(:)(b)
8I>(!)
A+TERNATI1E ANSWER)
It depends! ;n individual with pure
compensation income is not reDuired to *le
an income tax returns when she meets the
following conditionsC (4) the total gross
compensation income does not exceed
&hpH1111!11 and (:) the income tax has
been correctly withheld meaning
the tax withheld is eDual to the tax
due! (,ection -
l(A@(&)(b)
N6$!).
"here is no mention in the problem of the
amount of personal and additional
personal exemption to Duantify how much
is that compensation income that did not
exceed the personal and additional
personal exemptions! "here is no mention
either of whether or not the employers
withheld taxes and that the amount
withheld is eDual to the tax due! Whether
or not she will be reDuired to *le an
income tax return last ;pril 4, on the :111
income will depend on her compliance
with the reDuirements of the law!
IT8$ Persona" Income$ 5SIS Pension
(2)
<r! Mavier is a non%resident senior citi$en!
?e receives a monthly pension from the
./I/ which he deposits with the &8A%
<a#ati Aranch! Is he exempt from income
tax and therefore not reDuired to *le an
income tax return? (,-)
SUGGESTED
ANSWER)
<r! Mavier is exempt from income tax on
his monthly ./I/ pension (,ec. 5&(3)(.)
(f) N6$! of %**') but not on the interest
income that might accrue on the pensions
deposited with &8A which are
sub2ect to *nal withholding tax!
(onseDuently since <r! MavierBs sole
taxable income would have been sub2ected
to a *nal withholding tax he is not
reDuired anymore to *le an income tax
return! (,ec. -% (A) (&) (c). 6bid@.
IT8$ Persona" Income$ 0arrie& In&i(i&ua"
(2*)
>;< got married to 5I/; last
Manuary :11+! On
8ovember +1 :11+ 5I/; gave birth to
twins! Enfortunately however 5I/; died
in the course of her delivery! 'ue to
complications one of the twins also died
on 'ecember 4, :11+!
In preparing his Income "ax >eturn
(I">) for the year
:11+ what should >;< indicate in the
I"> as his civil status: (a) singleC (b)
marriedC (c) ?ead of the familyC (d)
widowerC (e) none of the above? Why?
>eason! (,-) SUGGESTED ANSWER)
>;< should indicate "(b) married" as his
civil status in preparing his Income "ax
>eturn for the year :11+! "he death of his
wife during the year will not change his
status because should the spouse die
during the taxable year the taxpayer may
still claim the same exemptions (that of
being married) as if the spouse died at the
close of such year (,ection 5-;!1 N6$!).
IT8$ Taxpayer$ /ia+i"ities$ Fa"sifie& Tax 8eturn (29)
'anilo who is engaged in the trading
business entrusted to his accountant the
preparation of his income tax return and
the payment of the tax due! "he
accountant *led a falsi*ed tax return by
underdeclaring the sales and overstating
the expense deductions by 'anilo!
Is 'anilo liable for the de*ciency tax and
the penalties
thereon? What is the liability if any of the
accountant? 'iscuss! (,-)
SUGGESTED ANSWER)
'anilo is liable for the deficiency tax as well
as for the deficiency interest! ?e should
not be held liable for the
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
21 of 73
fraud penalty because the accountant
acted beyond the
limits of his authority! "here is no showing
in the problem that 'anilo signed the
falsified return or that it was prepared
under his direction!
GOn the other hand the accountant may be
held criminally
liable for violation of the "ax (ode when he
falsi*ed the tax return by underdeclaring
the sale and overstating the expense
deductions! If 'annyBs accountant is a
(ertified &ublic ;ccountant his certi*cate
as a (&; shall automatically be revo#ed or
cancelled upon conviction!
Partners#ip: Income Tax (1999)
Iive years ago <arDue$ &eneyra Mayme
&osadas and
<anguiat all lawyers formed a partnership
which they named <arDue$ and &eneyra
5aw OFices! "he (ommis% sioner of Internal
>evenue thereafter issued $evenue $egu-
lation No. &-*5 implementing $A. '"*.
#nown as the /impli*ed 8et Income
"axation /cheme (/8I"/)! >evenue
>egulation 8o! :%J+ provides in part:
Sec. -. Ge+ea* Po2e))!o+a*
Pat+e)<!(! 9
"he general professional
partnership and the
partners are covered by >!;! L0JH!
"hus in determining pro*t of the
partnership only the direct costs
mentioned in said law are to be
deducted from partnership income!
;lso the expenses paid or Incurred
by partners in their individual
capacities in the practice of their
profession which are not reimbursed
or paid by the partnership but are
not considered as direct costs are not
deductible from his gross income!
4) <arDue$ and &eneyra 5aw Offices *led
a taxpayerBs suit alleging that >evenue
>egulation 8o! :%J+ violates the
principle of uniformity in taxation
because general professional
partnerships are now sub2ect to
payment of income tax and that there is
a difference in the tax treatment
between individuals engaged in the
practice of their respective profes%
sions and partners in general
professional partnerships! Is this
contention correct? 3xplain!
SUGGESTED ANSWER)
4) "he contention is not correct! .eneral
professional partnerships remain to be a
non%taxable entity! What is taxable are the
partners comprising the same and they are
obligated to report as income their share in
the income of the general professional
partnership during the taxable year
whether distributed or not! "he /8I"/ treat
professionals as one class of taxpayer so that
they shall be treated ali#e irrespective of
whether they practice their profession alone
or in association with other professionals
under a general professional partnership!
What are taxed differently are individuals and
corporations! ;ll individuals similarly situated
are taxed ali#e under the regulations
therefore the principle of uniformity in
taxation is not violated! On the contrary all
the reDuirements of a valid classification
have been complied with (To+ v). De*
Ro)a!o et a* G.R No. $/%35%# Octo7e)#
$%%.'.
:) Is >evenue >egulation 8o! :%J+ now
considered as having adopted a gross
income method instead of retaining the
net income taxation scheme? 3xplain!
SUGGESTED ANSWER)
:) 8o! >evenue >egulation
8o! :%J+
implementing >; 8o! L0JH have indeed
signi*cantly reduced the items of
deduction by limiting it to direct costs
and expenses or the 01- of gross receipts
maximum deduction in cases where the
direct costs are diFicult to determine! "he
allowance of limited deductions however
is still in consonance with the net income
taxation scheme rather than the gross
income method! While it is true that not all
the expenses of earning the income might
be allowed this can well be 2usti*ed by the
fact that deductions are not matters of
right but are matters of legislative grace!
Persona"$ Income Tax: 7on:8esi&ent A"ien
(2)
<r! (orte$ is a non%resident alien based
in ?ong Uong!
'uring the calendar year 4JJJ he came to
the &hilippines several times and stayed in
the country for an aggregated period of
more than 4=1 days! ?ow will <r! (orte$
be taxed on his income derived from
sources within the &hilippines and from
abroad? (,-)
SUGGESTED
ANSWER)
<r! (orte$ being a non%resident alien
individual who has stayed for an
aggregated period of more than 4=1 days
during the calendar year 4JJJ shall for
that taxable year be deemed to be a non%
resident alien doing business in the
&hilippines!
(onsidering the above <r! (orte$ shall be
sub2ect to an income tax in the same
manner as an individual citi$en and a
resident alien individual on taxable income
received from all sources within the
&hilippines! A,ec. &- (A) (%) N6$! of %**'@
"hus he is allowed to avail of the itemi$ed
deductions including the
personal and additional
exemptions but sub2ect to the rule on
reciprocity on the personal exemptions!
(,ec. 5" (A) to ()) and (8) in relation to
,ec. &- (A) (%) 6bid ,ec. 5- (B) 6bid.@
NCT4: 6t is suggested that full credit
should be given if the
examineeDs answer only cover the
Erst two paragraphs.
Persona"$ Income Tax: 7on:8esi&ent !iti?en
(1999)
; (o! a &hilippine corporation has an
executive (&) who
is a Iilipino citi$en! ; (o! has a subsidiary
in ?ong Uong (?U (o!) and will assign &
for an inde*nite period to wor# full time
for ?U (o! & will bring his family to reside
in ?U and will lease out his residence in
the &hilippines! "he salary of & will be
shouldered ,1- by ; (o! while the other
,1- plus housing cost of living and
educational allowances of &Bs dependents
will be shouldered by ?U (o! ; (o! will
credit the ,1- of &Bs salary to &Bs
&hilippine ban# account! & will sign the
contract of employment in the &hilippines! &
will also be receiving rental income for the
lease of his &hilippine residence! ;re these
salaries allowances and rentals sub2ect to
the &hilippine income tax? (,-)
SUGGESTED ANSWER)
"he salaries and allowances received by &
are not sub2ect to &hilippine income tax! &
Duali*es as a nonresident citi$en because he
leaves the &hilippines for employment
reDuiring him to be physically present
abroad most of the time during the taxable
year! (,ection &&(4) N6$!). ; non% resident
citi$en is taxable only on income derived
from &hilippine sources! (,ection &5
N6$!). "he salaries and
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
22 of 73
allowances received from being
employed abroad are
incomes from without because these are
compensation for services rendered
outside of the &hilippines! (,ection
"&
N6$!).
?owever & is taxable on rental income for
the lease of his &hilippine residence
because this is an income derived from
within the leased property being located in
the &hilippines! (,ection "& N6$!).
Persona"$ Income Tax: Tax:Free 2xc#ange (199,)
"hree brothers inherited in 4JJ: a parcel
of land valued for real estate tax purposes
at &+!1 million which they held in co%
ownership! In 4JJ, they transferred the
property to a newly organi$ed corporation
as their eDuity which was placed at the
$onal value of &H!1 million! In exchange for
the property the three brothers thus each
received shares of stoc# of the corporation
with a total par value of &:!1 million or
altogether a total of &H!1 million! 8o
business was done by the (orporation and
the property remained idle! In the early
part of 4JJL one of the brothers who was
in dire need of funds sold his shares to the
two brothers for &:!1 million! Is the
transaction sub2ect to any internal revenue
tax (other than the documentary stamp tax)?
SUGGESTED ANSWER)
7es! "he exchange in 4JJ, is a tax%free
exchange so that the subseDuent sale of one
of the brothers of his shares to the other
two (:) brothers in 4JJL will be sub2ect
to income tax! "his is so because the
tax%free exchange merely deferred the
recognition of income on the exchange
transaction! "he gain sub2ect to income
tax in the sale is measured by the diFerence
between the selling price of the shares (&:
<illion) and the basis of the real property in
the hands of the transferor at the time of
exchange which is the fair mar#et value of
his share in the real property at the time of
inheritance (/ection +0(b)(:) 8I>()! "he
net gain from the sale of shares of stoc# is
sub2ect to the schedular capital gains tax of
41- for the *rst &411!111 and :1- for
the excess thereof (/ection
:l(d)
8I>()!
A+TERNATI1E ANSWER)
"he exchange eFected in 4JJ, did not
Dualify as a tax%free exchange because there
is no showing that the three brothers gained
control of the corporation by acDuiring at
least ,4- of the voting rights! /ince the
entire gain on the exchange was previously
sub2ected to income tax then the sale will
also be taxable if a gain results therefrom! In
the instant case the sale will not be sub2ect
to any internal revenue tax other than the
documentary stamp tax because the seller
did not reali$e any gain from the sale! "he
gain is measured by the diFerence between
the amount reali$ed (selling price) and the
basis of the property! Incidentally the basis
to him is his share in the value of the
property received at the time of exchange
which is &: <illion an amount 2ust eDual to
the amount reali$ed from the sale!
Persona"$ Income Tax$ !ontract of /ease (1999)
<r! 'omingo owns a vacant parcel of land!
?e leases the
land to <r! 3nriDue$ for ten years at
a rental of
&4:111!11 per year! "he condition is that
<r! 3nriDue$
will erect a building on the
land which will
become the property of <r! 'omingo at the
end of the lease without compensation or
reimbursement whatsoever for the value of
the building!
<r! 3nriDue$ erects the building! Epon
completion the building had a fair mar#et
value of &4 <illion! ;t the end of the lease
the building is worth only &J11!111!11 due
to depreciation!
Will <r! 'omingo have income when the
lease expires and becomes the owner of
the building with a fair mar#et value of
&J11!111!11? ?ow much income must he
report on the building? 3xplain!
SUGGESTED
ANSWER)
When a building is erected by a lessee in
the leased premises in pursuance of an
agreement with the lessor that the
building becomes the property of the lessor
at the end of the lease the lessor has
the option to report income as follows:
4) "he lessor may report as income the
mar#et value of
the building at the time when
such building is completedC or
:) "he lessor may spread over the life of
the lease the estimated depreciated
value of such building at the
termination of the lease and report as
income for each year of the lease an
aliDuot part thereof (/ec!
0J >> 8o! :)!
Ender the *rst option the lessor will
have no income when the lease expires
and becomes the owner of the building!
"he second option will give rise to an
income during the year of lease expiration
of &J1!111!11 or 4O41 of the depreciated
value of the building!
"he availment of the first option will
reDuire <r! 'omingo to report an income
of &4!111111!11 during the year when
the building was completed! ; total of
&J11!111!11 income will be reported under
the second option but will be spread over
the life of the lease or &J1!111!11 per year!
A+TERNATI1E
ANSWER)
<r! 'omingo will reali$e an income
when the lease expires and becomes the
owner of the building with a fair mar#et
value of &J11!111!11 because the condition
for the lease is the transfer of the building
at the expiration of the lease! "he income
to be reali$ed by <r! 'omingo at the time
of the expiration will consist of the value of
the building which is &J11!111!11 and any
rental income that has accrued as of said
date!
Persona"$ Income Tax$ 0arrie& In&i(i&ua" (199,)
<ar and Moy got married in 4JJ1! ; wee#
before their
marriage! Moy received by
way of donation a
condominium unit worth &L,1!111!11 from
her parents! ;fter marriage some
renovations were made at a cost of
&4,1!111!11! "he spouses were both
employed in 4JJ4 by the same company!
On +1 'ecember 4JJ: their *rst child
was born and a second child was born
on 1L
8ovember 4JJ+! In 4JJ0 they sold the
condominium unit and bought a new unit!
Ender the foregoing facts what
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
2* of 73
were the events in the life of the spouses
that had income
tax
incidences?
SUGGESTED ANSWER)
"he events in the life of spouses! <ar and
Moy which have income tax incidences are
the following:
4) "heir marriage in 4JJ1 Duali*es
them to claim personal exemption for
married individualsC
:) "heir employment in 4JJ4 by the
same company will ma#e them liable to
the income tax imposed on gross
compensation incomeC
+) Airth of their *rst child in 'ecember
4JJ: would
give rise to an additional exemption of
&,111 for taxable year 4JJ:C
0) Airth of their second child in 8ovember
4JJ+ would li#ewise entitle them to
claim additional exemption of
&,111 raisingtheir additional
personal exemptions to & 41111 for
taxable year 4JJ+C and
,) /ale of their condominium unit in 4JJ0
shall ma#e the spouses liable to the ,-
capital gains tax on the gain presumed
to have been reali$ed from the sale!
Persona"$ Income Tax$ 8etiring A"ien 2mp"oyee (29)
;n alien employee of the ;sian
'evelopment Aan#
(;'A) who is retiring soon has oFered to
sell his car to you which he imported tax%
free for his personal use! "he privilege of
exemption from tax is granted to Dualified
personal use under the ;'A (harter which
is recogni$ed by the tax authorities! If you
decide to purchase the car is the sale
sub2ect to tax? 3xplain! (,-)
SUGGESTED ANSWER)
"he sales transaction is sub2ect to value
added tax (6;") under /ec! 41L(A) of the
8I>( although this provision is expressly
excluded from the coverage of the :11, bar
exam!
"he proceeds from the sale are sub2ect to
income tax! "he car is considered a capital
asset of the retiring alien employee because
he is not engaged in the business of buying
and selling cars! ?e therefore derived
income which should be reported in his
income tax return! (/ees!
+: and +J
8I>()
Persona"$ Income Taxation: 7on:8esi&ent !iti?en (199,)
Muan a Iilipino citi$en has immigrated
to the Enited /tates where he is now a
permanent resident! ?e owns certain
income%earning property in the &hilippines
from which he continues to derive
substantial income! ?e also receives income
from his employment in the Enited /tates on
which the E/ income tax is paid! On which
of the above income is the taxable if at all
in the &hilippines and how in general terms
would such income or incomes be taxed?
SUGGESTED ANSWER)
Muan shall be taxed on both his income from
the &hilippines and on his Income from the
Enited /tates be% cause his being a citi$en
ma#es him taxable on all Income wherever
derived! Ior the income he derives from his
property in the &hilippines Muan shall be
taxed on his net income under the
S!6(*!Fed Net I+co6e Ta@at!o+
Sc<e6e (/8I"/) whereby he shall be
considered as a self%employed individual! ?is
Income as employee in the Enited /tates
on the other hand shall be taxed in
accordance with the schedular
graduated rates of
4- :- and +-! based on the ad2usted
gross income derived by non%resident
citi$ens from all sources without the
&hilippines during each taxable year!
Taxa+"e Income: I""ega" Income (1999
Bar)
<r! 5a2o2o is a big%time swindler! In one
year he was able
to earn &4 <illion from his swindling
activities! When the (ommissioner of
Internal >evenue discovered his income
from swindling the (ommissioner assessed
him a deficiency income tax for such
income! "he lawyer of <r! 5a2o2o protested
the assessment on the following grounds:
4) "he income tax applies only to legal
income not to
illegal
incomeC
:) <r! 5a2o2oBs receipts from his
swindling did not
constitute income because he was
under obligation to return the amount
he had swindled hence his receipt
from swindling was similar to a loan
which is not income because for every
peso borrowed he has a corresponding
liability to pay one pesoC and
+) If he has to pay the de*ciency
income tax assess%
ment there will be hardly anything left
to return to the victims of the
swindling!
?ow will you rule on each of the three
grounds for the protest? 3xplain!
SUGGESTED
ANSWERS)
4) "he contention that the income tax
applies to legal income and not to illegal
income is not correct! /ection
:=(a) of the "ax (ode includes within
the purview of
gross income all Income from whatever
source derived! ?ence the illegality of the
income will not preclude the imposition of
the income tax thereon!
:) "he contention that the receipts from
his swindling did not constitute income
because of his obligation to return the
amount swindled is li#ewise not correct!
When a taxpayer acDuires earnings
lawfully or unlawfully without the
consensual recognition express or implied
of an obligation to repay and without
restriction as to their disposition he has
received taxable income even though it
may still be claimed that he is not entitled
to retain the money and even though he
may still be ad2udged to restore its
eDuivalent (>a6e) v). U.S.#8-- U.S. 3$8#
$%-$'. "o treat the embe$$led funds not
as taxable income would perpetuate
in2ustice by relieving embe$$lers of the duty
of paying income taxes on the money they
enrich themselves with through
embe$$lement while honest people pay
their taxes on every conceivable type of
income! ()ames vs. F.,.)
+) "he de*ciency income tax assessment is
a direct tax imposed on the owner which is
an excise on the privilege to earn an
income! It will not necessarily be paid out
of the same income that were sub2ected to
the tax! <r! 5a2o2oBs liability to pay the tax is
based on his having reali$ed a taxable
income from his swindling activities and will
not aFect his obligation to ma#e restitution!
&ayment of the tax is a civil obligation
imposed by law while restitution is a civil
liability arising from a crime!
Taxa+"e or 7on:Taxa+"e$ Income an& 5ains (29)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
24 of 73
3xplain brie)y whether the following items
are taxable or
non%taxable:
(,-)
a) Income from
>UETENGC
SUGGESTED ANSWER)
"axable! .ross income includes "all income
derived from whatever source" (,ec.
5&AA@ N6$!) which was interpreted as
all income not expressly excluded or
exempted from the class of taxable income
irrespective of the voluntary or involuntary
action of the taxpayer in producing the
income! "hus the income may proceed
from a legal or illegal source such as from
2ueteng! Enlawful gains gambling winnings
etc! are sub2ect to income tax! "he tax code
stands as an indifferent neutral party on the
matter of where the income comes from!
(Co66!))!o+e o2 I+te+a* Reve+0e v.
Ma++!+"# G.R. No. L=358%5# A0"0)t -#
$%&4'
b) .ain arising from
EXPROPRIATION OF PROPERTDC
SUGGESTED ANSWER)
"axable! /ale exchange or other disposition
of property to the government of real
property is taxable! It includes ta#ing by the
government through condemnation
proceedings! (Go+Ga*e) v. Co0t o2 Ta@
A((ea*)# G.R. No. L=$.483# Ma1 3-# $%-4'
c) TAXES paid and subseDuently
refundedC
SUGGESTED ANSWER)
"axable only if the taxes were paid and
claimed as deduction and which are
subseDuently refunded or credited! It shall
be included as part of gross income in the
year of the receipt to the extent of the
income tax bene*t of said deduction! (,ec.
5"A!@A%@ N6$!) 8ot taxable if the taxes
refunded were not originally claimed as
deductions!
d) >ecovery of BAD DEBTS previously
charged oFC
SUGGESTED ANSWER)
"axable under the TAX BENEFIT RULE!
>ecovery of bad debts previously
allowed as deduction in the preceding
years shall be included as part of the gross
income in the year of recovery to the extent
of the income tax bene*t of said deduction!
(,ec. 5"A4@A%@ N6$!) "his is sometimes
referred as the RECAPTURE RULES!
e) .ain on the sale of a car used for
personal purposes!
SUGGESTED ANSWER)
"axable! /ince the car is used for personal
purposes it is considered as a capital asset
hence the gain is considered income! (,ec.
5&AA@A5@ and ,ec. 5*AA@A%@ N6$!)
-it##o"&ing Tax: 7on:8esi&ent A"ien (21)
Is a non%resident alien who is not engaged in
trade or business or in the exercise of
profession in the &hilippines but who derived
rental income from the &hilippines reDuired
to *le an income tax return on ;pril of the
year following his receipt of said income? If
not why not? 3xplain your answer! (,-)
SUGGESTED ANSWER)
8o! "he income tax on all income
derived from &hilippine sources by a non%
resident alien who is not engaged in trade or
business in the &hilippines is withheld by the
lessee as a Iinal Withholding "ax! (,ection
-'(A) N6$!). "he government can not
reDuire persons outside
of its territorial 2urisdiction to *le
a returnC for
this reason the income tax on income
derived from within must be collected
through the withholding tax system and
thus relieve the recipient of the income
the duty to *le income tax returns!
(,ection -% N6$!).
-it##o"&ing Tax: 8etirement Benefit
(2)
"o start a business of his own <r! <ario
de .u$man opted for an early retirement
from a private company after ten (41)
years of service! &ursuant to the companyBs
Duali*ed and approved private retirement
bene*t plan he was paid his retirement
bene*t which was sub2ected to withholding
tax! Is the employer correct in
withholding the tax? 3xplain! (:-)
SUGGESTED
ANSWER)
(a) It depends! ;n employee retiring under
a companyBs Duali*ed and private
retirement plan can only be exempt from
income tax on his retirement benefits if
the following reDuisites are met:
(4) that the retiring employee must have
been in service of the same employer
for at least ten (41) yearsC
(:) that he is not less than ,1 years of
age at the time of retirementC and
(+) the bene*t is availed of
only once!
In the instant case there is no mention
whether the employee has li#ewise
complied with reDuisites number (:) and
(+)!
-it##o"&ing Tax: 8etirement Benefit
(2)
Ender what conditions are retirement
bene*ts received by
oFicials and employees of private *rms
excluded from
gross income and exempt from
taxation? (+-)
SUGGESTED
ANSWER)
"he conditions to be met in order that
retirement benefits received by officials
and employees of private *rms are
excluded from gross income and exempt
from taxation are as follows:
:! Ender >epublic ;ct 8o! 0J4L (those
received under a reasonable private
bene*t plan):
a! the retiring oFicial or employee
must have been in service of the
same employer for at least ten (41)
yearsC
b! that he is not less than *fty (,1)
years of age at
the time of
retirementC and
c! that the bene*t is availed of only once!
+! Ender >epublic ;ct 8o! LH04 (those
received from employers without any
retirement plan):
a! "hose received under existing
collective
bargaining agreement and other
agreements are exemptC and
b! In the absence of retirement plan or
agreement providing for retirement
bene*ts the bene*ts are excluded
from gross income and exempt from
income tax if:
i! retiring employee must have
served at least *ve(,) yearsC
and
ii! that he is not less than sixty
(H1) years of age but not more
than sixty *ve (H,)!
-it##o"&ing Tax: 8oya"ty (22)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
2. of 73
"he <UA%&hils! is a AOI%registered domestic
corporation
licensed by the <UA of the Enited
Uingdom to distribute support and use in
the &hilippines its computer software
systems including basic and related
materials for ban#s! "he <UA%&hils!
provides consultancy and technical
services incidental thereto by entering into
licensing agreements with ban#s! Ender
such agreements the <UA%&hils! will not
acDuire any proprietary rights in the
licensed systems! "he <UA%&hils! pays
royalty to the <UA%EU net of 4,-
withholding tax prescribed by the >&%EU
"ax "reaty!
Is the income of the <UA%&hils! under the
licensing agreement with ban#s considered
royalty sub2ect to :1- *nal withholding
tax? Why? If not what #ind of tax will its
income be sub2ect to? 3xplain! (,-)
SUGGESTED ANSWER)
7es! "he income of <UA%&hils! under the
licensing agreement with ban#s shall be
considered as royalty sub2ect to the :1-
*nal withholding tax! "he term royalty is
broad enough to include technical advice
assistance or services renderedin
connection with technical
management or administration of any
scientific industrial or commercial
underta#ing venture pro2ect or scheme!
(/ec! 0:(0)(f) 8I>()! ;ccordingly the
consultancy and technical services rendered
by <UA%&hils which are incidental to the
distribution support and use of the
computer systems of <UA%EU are taxable as
royalty!
-it##o"&ing Tax$ !o(erage (2*)
(iting /ection 41 ;rticle 6III of the 4J=L
(onstitution which provides that salaries of
2udges shall be *xed by law and that during
their continuance in of*ce their salary
shall not be decreased a 2udge of <<
>egional "rial (ourt Duestioned the
deduction of withholding taxes from his
salary since it results into a net deduction of
his pay! Is the contention of the 2udge
correct? >eason brie)y! (,-) SUGGESTED
ANSWER)
8o! "he contention is incorrect! "he salaries
of 2udges are not tax%exempt and their
taxability is not contrary to the provisions of
/ection 41 ;rticle 6III of the (onstitution
on the non%diminution of the salaries of
members of the 2udiciary during their
continuance in oFice! "he clear intent of
the (onstitutional (ommission that framed
the (onstitution is to sub2ect their salaries
to tax as in the case of all taxpayers!
?ence the deduction of withholding
taxes being a manner of collecting the
income tax on their salary is not a
diminution contemplated by the fundamental
law! (N!ta2a+ et. a*. v. CIR# $43 SCRA
35. 9$%5&R)!
-it##o"&ing Tax$ 'omestic !orporation$ !as# 'i(i&en&s
(21)
What do you thin# is the reason why
cash dividends
when received by a resident citi$en or alien
from a domestic corporation are taxed only
at the *nal tax of
41- and not at the progressive tax rate
schedule under /ection :0(;) of the "ax
(ode? 3xplain your answer! (,-)
SUGGESTED ANSWER)
"he reason for imposing *nal withholding tax
rather than the progressive tax schedule on
cash dividends received by
a resident citi$en or alien from
a domestic
corporation is to ensure the collection of
in come tax on said inc o me! If we sub2ect
the dividend to the progressive tax rate
which can only be done through the *ling
of income tax returns there is no
assurance that the taxpayer will declare
the income especially when there are
other items of gross income earned during
the year! It would be extremely dif*cult for
the AI> to monitor compliance considering
the huge number of stoc#holders! Ay
shifting the responsibility to remit the tax
to the corporation it is very easy to chec#
compliance because there are fewer
withholding agents compared to the
number of income recipients!
5i#ewise the imposition of a *nal
withholding tax will ma#e the tax
available to the government at an earlier
time! Iinally the *nal withholding tax will
be a sure revenue to the government
unli#e when the dividend is treated as a
returnable income where the recipient
thereof who is in a tax loss position is
given the chance to oFset such loss against
dividend income thereby depriving the
government of the tax on said dividend
income! QNote: 6t is recommended that
any of the foregoing answers can be given
full credit because the 7uestion involves a
policy issue which can only be found in the
deliberations of !ongress!R
A+TERNATI1E
ANSWER)
"he reason why cash dividends received
by a resident citi$en or alien from a
domestic corporation are sub2ected to the
*nal withholding tax of 41- and not at the
progressive rate tax schedule is to lessen
the impact of a second layer of tax on the
same income!
-it##o"&ing Tax$ Income su+@ect t#ereto
(21)
What is meant by income sub2ect to "*nal
tax"? .ive at least two examples of income
of resident individuals that is sub2ect to
the *nal tax! (+-)
SUGGESTED
ANSWER)
Income sub2ect to *nal tax refers to an
income wherein the tax due is fully
collected through the withholding tax
system! Ender this procedure the payor of
the income withholds the tax and remits
it to the government as a *nal settlement
of the income tax due on said income!
"he recipient is no longer reDuired to
include the item of income sub2ected to
"*nal tax" as part of his gross income in his
income tax returns! 3xamples of income
sub2ect to *nal tax are dividend income
interest from ban# deposits royalties etc!
-it##o"&ing Tax$ 7on:8esi&ent A"ien (199*)
Iour (atholic parishes hired the services of
Iran# Ainatra
a foreign non%resident entertainer to
perform for four (0) nights at the Iol# ;rts
"heater! Ainatra was paid &:11!111!11 a
night! "he parishes earned &4111111!11
which they used for the support of the
orphans in the city! Who are liable to pay
taxes?
SUGGESTED ANSWER)
"he following are liable to pay
income taxes:
(a) "he four catholic parishes because
the income received by them not being
income earned "as such" in the
performance of their religious functions
and duties is taxable income under the
last paragraph of /ec! :H in relation to
/ec! :H(e) of the "ax (ode! In
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
26 of 73
promoting and operating the Ainatra
/how they
engaged in an activity conducted for
pro*t! (Ibid!)
(b) "he income of Iran# Ainatra a non%
resident alien under our law is taxable
at the rate of +1- *nal withholding tax
based on the gross income from the
show! <r! Ainatra is not engaged in any
trade or business in the &hilippines!
-it##o"&ing Tax$ 7on:8esi&ent !orporation (199*)
Aates ;dvertising (ompany is a non%
resident corporation
duly organi$ed and existing under the laws
of /ingapore! It is not doing business
and has no oFice in the &hilippines!
&ilipinas .arment Incorporated a
domestic corporation retained the services
of Aates to do all the advertising of its
products abroad! Ior said services AatesB
fees are paid through outward
remittances! ;re the fees received by Aates
sub2ect to any withholding tax?
SUGGESTED ANS?ER:
"he fees paid to Aates ;dvertising (o! a
non%resident foreign corporation are not
sub2ect to withholding tax since they are
not sub2ect to &hilippine tax! "hey are
exempt because they do not constitute
income from &hilippine sources the same
being compensation for labor or personal
services performed outside the &hilippines
(/ec! +HGc) (+) and /ec! :,(b)(l) "ax (ode)!
-it##o"&ing Tax$ 8ea&erAs 'igest A1ar& (199=)
Is the pri$e of one million pesos awarded by
the >eaderBs
'igest sub2ect to withholding of *nal
tax? Who is
responsible for withholding the tax?
What are the liabilities for failure to
withhold such tax? Q,-R SUGGESTED ANSWER)
4) It depends! If the pri$e is considered
as winnings derived from sources
within the &hilippines it is sub2ect to
withholding of final tax (/ec! :0QAR in
relation to /ec! ,LQ;R 8I>()! If
derived from sources without the
&hilippines it is not sub2ect to
withholding of *nal tax because the
&hilippine tax law and regulations could
not reach out to foreign 2urisdictions!
:) "he tax shall be withheld by the
>eaderBs 'igest or local agent who has
control over the payment of the pri$e!
+) ;ny person reDuired to withhold or
who willfully fails to withhold shall in
addition to the other penalties provided
under the (ode be liable upon
conviction to a penalty eDual to the total
amount of tax not withheld (/ec! :,4
8I>()! In case of failure to withhold the
tax or in the case of under withholding
the deficiency tax shall be collected
from the payorOwithholding agent (4st
par!! /ec!
:!,LQ;R >!>! 8o! :%J=)!
;ny person reDuired under the "ax (ode or
by rules and regulations to withhold taxes at
the time or times reDuired by law or rules
and regulations shall in addition to other
penalties provided by law upon conviction
be punished by a *ne of not less than
"en thousand pesos (&hp
41!1OO) and suFer imprisonment of not less
than one (4)
year but not more than ten (41)
years (4st par!
/ec! :,,
8I>()!
COMMENT: It is suggested that any of the
following answers to the Duestion "What are
the liabilities for failure to withhold such a
tax?" be given full credit:
4) "he payor shall be liable for the payment
of the tax which was not withheld!
:) "he payerOwithholding agent shall be
liable to both civil and criminal penalties
imposed by the "ax (ode!
-it##o"&ing Tax$ Time 'eposit Interest$ 5SIS
Pension
(199
*)
<aribel /antos a retired public school
teacher relies on
her pension from the ./I/ and the
Interest Income from a time deposit of
&,11!111!11 with ;A( Aan#! Is <iss
/antos liable to pay any tax on her Income?
SUGGESTED
ANSWER)
<aribel /antos is exempt from tax on the
pension from the ./I/ (,ec. &/(b((')(<)
Tax !ode). ?owever as regards her time
deposit the interest she receives
thereon is sub2ect to :1- *nal withholding
tax! (,ec. &%(a)(c) Tax !ode).
DEDUCTIONS,
EXEMPTIONS, EXC+USIONS
- INC+USIONS
'e&uction: Faci"itation Fees or >BicB+acB>
(199=)
<( .arcia a contractor who won the
bid for the
construction of a public highway claims as
expenses facilitation fees which according
to him is standard operating procedure in
transactions with the government! ;re
these expenses allowable as deduction
from gross income? Q,-R
SUGGESTED
ANSWER)
8o! "he alleged facilitation fees which he
claims as standard operating procedure in
transactions with the government comes in
the form of bribes or "#ic#bac#" which are
not allowed as deductions from gross
income (,ection 5"(A)(l)(c) N6$!)!
'e&uctions: %r&inary Business 2xpenses
(2*)
O@7 is the president and chief executive
oFicer of ;''
(omputers Inc! When O@7 was as#ed
to 2oin the
government service as director of a bureau
under the 'epartment of "rade and
Industry he too# a leave of absence from
;''! Aelieving that its business outloo#
goodwill and opportunities improved with
O@7 in the government ;'' proposed to
obtain a policy of insurance on his life! On
ethical grounds O@7 ob2ected to the
insurance purchase but ;'' purchased the
policy anyway! Its annual premium
amounted to &411111! Is said premium
deductible by ;'' (omputers Inc!? >eason!
(,-)
SUGGESTED ANSWER)
8o! "he premium is not deductible because
it is not an ordinary business expense! "he
term "ordinary" is used in the income tax
law in its common signi*cance and it has the
connotation of being normal usual or
customary (De(0t1 v. D0 Po+t# 8/5 US .55
9$%./:'! &aying premiums for the
insurance of a person not connected to
the company is not normal usual or
customary!
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
22 of 73
;nother reason for its non%deductibility is
the fact that it
can be considered as an illegal
compensation made to a government
employee! "his is so because if the
insured his estate or heirs were made as
the beneficiary (because of the re7uirement
of insurable interest) the payment of
premium will constitute bribes which are
not allowed as deduction from gross income
(,ection 5"AA@Al@Ac@ N6$!).
On the other hand if the company was made
the beneficiary whether directly or
indirectly the premium is not allowed as a
deduction from gross income (,ection
5.AAG%"@
N6$!).
'e&uctions: Amount for Bri+e (21)
In order to facilitate the processing of its
application for a license from a government
oFice (orporation ; found it necessary to
pay the amount of &hp 411111 as a bribe to
the approving oFicial! Is the &hp 411111
deductible from the gross income of
(orporation ;? On the other hand is the
&hp 411111 taxable income of the
approving oFicial? 3xplain your answers!
(,-)
SUGGESTED ANSWER)
/ince the amount of &hpl11!111 constitutes
a bribe it is not allowed as a deduction from
gross income of (orporation ; (,ection
5"(A)(l)(c) N6$!)! ?owever to the
recipient government oFicial the same
constitutes a taxable income! ;ll income
from legal or illegal sources are taxable
absent any clear provision of law
exempting the same! "his is the reason why
gross income had been de*ned to include
income from whatever source derived!
(,ection 5&(A) N6$!). Illegally acDuired
income constitutes reali$ed income under
the claim of right doctrine (R0tB!+ v. US#
8.8 US $8/'.
'e&uctions: !apita" /osses$ Pro#i+itions (24)
What is the rationale for the rule
prohibiting the
deduction of capital losses from ordinary
gains? 3xplain!
SUGGESTED ANSWER)
It is to insure that only costs or expenses
incurred in earning the income shall be
deductible for income tax purposes
consonant with the reDuirement of the law
that only necessary expenses are allowed as
deductions from gross income! "he term
"N4!4,,A$H 4I94N,4," presupposes
that in order to be allowed as deduction the
expense must be business connected
which is not the case insofar as capital
losses are concerned! "his is also the reason
why all non%business connected expenses li#e
personal living and family expenses are not
allowed as deduction from gross income
(,ection 5.(A)(%) of the %**'
Tax
!ode).
"he prohibition of deduction of capital losses
from ordinary gains is designed to forestall
the shifting of deductions from an area
sub2ect to lower taxes to an area sub2ect to
higher taxes thereby unnecessarily resulting
in lea#age of tax revenues! (apital gains are
generally taxed at a lower rate to prevent
among others the bunching of income in one
taxable year which is a liberality in the law
begotten from motives of public policy ($ule
on =olding 9eriod)! It stands to reason
therefore that if the transaction results in
loss the same should be allowed only from
and to the extent of capital gains and not to
be deducted from
ordinary gains which are sub2ect to
a higher rate
of income tax! (!hirelstein <ederal
6ncome Taxation %*''
4
d.
)
'e&uctions: 'e&ucti+"e Items from 5ross Income (1999)
3xplain if the following items are
deductible from gross income for income
tax purposes! 'isregard who is the
person claiming the expense! (,-)
4) Interest on loans used to acDuire
capital eDuipment
or
machiner
y!
:) 'epreciation of
goodwill!
SUGGESTED
ANSWER)
4) I+tee)t o+ *oa+) 0)ed to acE0!e
ca(!ta* eE0!(= 6e+t o 6ac<!+e1 is
a deductible item from gross
income! "he law gives the taxpayer the
option to claim as
a deduction or treat as capital expenditure
interest in% curred to acDuire property used
in trade business or exercise of a
profession! (,ection 5"(3) (5) N6$!).
:) De(ec!at!o+ 2o "ood,!** is not
allowed as de% duction from gross income!
While intangibles maybe allowed to be
depreciated or amorti$ed it is only
allowed to those intangibles whose use in
the business or trade is de*nitely limited
in duration! (Ba)!*a+ E)tate)# I+c. v#
CIR# 3$ SCRA $&)! /uch is not the case
with goodwill!
A+TERNATI1E
ANSWER)
'epreciation of goodwill is allowed as a
deduction from gross income if the
goodwill is acDuired through capital outlay
and is #nown from experience to be of
value to the business for only a limited
period! (,ection %(' $evenue $egulations
No. &)! In such case the goodwill is
allowed to be amorti$ed over its useful life
to allow the deduction of the current
portion of the expense from gross income
thereby paving the way for a proper
matching of costs against revenues which
is an essential feature of the income tax
system!
'e&uctions: Income Tax: 'onation: 8ea" Property (22)
On 'ecember 1H :114 568
(orporation donated a piece of vacant
lot situated in <andaluyong (ity to an
accredited and duly registered non%
stoc# non%pro*t educational institution to
be used by the latter in building a sports
complex for students!
;! <ay the donor claim in full as
deduction from its gross income for the
taxable year :114 the amount of the
donated lot eDuivalent to its fair mar#et
valueO$onal value at the time of the
donation? 3xplain your answer! (:-)
SUGGESTED ANSWER)
;! 8o! 'onations andOor contributions
made to Duali*ed donee institutions
consisting of property other than money
shall be based on the acDuisition cost of
the property! "he donor is not entitled
to claim as full deduction the fair mar#et
valueO$onal value of the lot donated!
(/ec! +0(?) 8I>()!
A! In order that donations to non%stoc#
non%pro*t educational institution may be
exempt from the donorBs gift tax what
conditions must be met by the donee?
(+-)
SUGGESTED ANSWER)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
24 of 73
A! In order that donations to non%stoc#
non%pro*t
educational institution may be exempt
from the donorBs gift tax it is reDuired
that not more than +1- of the said gifts
shall be used by the donee%institution for
administration purposes! (/ec! 414(;)(+)
8I>()!
'e&uctions: 7on:'e&ucti+"e Items$ 5ross Income (1999)
3xplain if the following items are
deductible from gross income for income
tax purposes! 'isregard who is the person
claiming the deduction! (,-)
4! >eserves for bad
debts!
:! Worthless
securities
SUGGESTED ANSWER)
4! RESERVE FOR BAD DEBTS are not
allowed as deduction from gross income!
Aad debts must be charged off during
the taxable year to be allowed as
deduction from gross income! "he mere
setting up of reserves will not give rise
to any deduction! (/ection
+0(3)!
8">()!
&. ?ORTHLESS SECURITIES which are
ordinary assets are not allowed as
deduction from gross income because
the loss is not reali$ed! ?owever if these
worthless securities are capital assets
the owner is considered to have incurred
a capital loss as of the last day of the
taxable year and therefore deductible
to the extent of capital gains! (,ection
5"(B)(") N6$!). "his deduction
however is not allowed to a ban# or
trust company! (,ection 5"(4)(&) N6$!).
'e&uctions: 8e3uisites$ 'e&uci+i"ity of a /oss (199=)
.ive the reDuisites for deducibility of
a loss! (,-4
SUGGESTED ANSWER)
"he reDuisites for deducibility
of a loss are
4) loss belongs to the
taxpayerC
:) actually sustained and charged oF
during the taxable
yea
rC
+) evidenced by a closed and
completed transactionC
0) not compensated by Insurance or
other forms of indemnityC
,) not claimed as a deduction for estate
tax purposes in case of individual
taxpayersC and
H) if it is a casualty loss it is evidenced by a
declaration of loss *led within 0, days
with the AI>!
COMMENT)
"he Duestion is vague! "here are different
#inds of losses recogni$ed as deductible under
the "ax (ode! "hese are losses in general (/ec!
+0Q'R(4)C net operating loss carryover (/ec!
+0Q'R(+)C capital losses (/ec! +0Q'R(0)C 5osses from
wash sales of stoc#s or securities (/ec! +0Q'R
(,) in relation to /ec! +=)C wagering losses
(/ec! +0Q'R(H)C and abandonment losses (/ec!
+0('R(L)! 5osses are also deductible from the
gross estate (/ec!
=HQ;R(l)(e)
8I>()!
(onsidering the time allotted for a five (,) point
Duestion is only nine (J) minutes the candidates
would not be able to write down a complete
answer! It is suggested that any answer which
states the reDuisites for the deducibility of any of
the above losses be given full credit!
'e&uctions$ Income Tax: A""o1a+"e 'e&uctions (21)
"axpayers whose only income consists of
salaries and wages from their employers
have long been complaining
that they are not allowed to
deduct any item
from their gross income for purposes of
computing their nettaxable income!With
the passageof the
(omprehensive "ax >eform ;ct of
4JJL is this complaint still valid?
3xplain your answer! (,-) SUGGESTED
ANSWER)
8o more! .ross compensation income
earners are now allowed at least an item of
deduction in the form of premium
payments on health andOor hospitali$ation
insurance in an amount not exceeding
&:011 per annum Q/ection +0(<)R! "his
deduction is allowed if the aggregate
family income do not exceed &:,1!111 and
by the spouse in case of married
individual who claims additional personal
exemption for dependents!
'e&uctions$ Canis#ing 'e&uction$ Purpose
(26)
6anishing deduction is availed of by
taxpayers to:
a! (orrect his accounting records to
re)ect the actual
deductions
made
b! >educe his gross
income
c! >educe his output value%added
tax liability d! >educe his gross
estate
(hoose the correct answer!
3xplain! (,-)
SUGGESTED
ANSWER)
(') reduce his gross estate! 6anishing
deduction or prop% erty previously taxed is
one of the items of deduction allowed in
computing the net estate of a decedent
(,ection
/.AA@A&@ and /.A3@
A&@ N6$!).
2xc"usion ; Inc"usion$ 5ross 8eceipts
(26)
(ongress enacts a law imposing a ,- tax
on gross receipts
of common carriers! "he law does not
define the term "gross receipts!" 3xpress
"ransport Inc! a bus company plying the
<anila%Aaguio route has time deposits
with ;A( Aan#! In :11, 3xpress
"ransport earned &4 <illion interest after
deducting the :1- *nal withholding tax
from its time deposits with the ban#! "he
AI> wants to collect a ,- gross receipts
tax on the interest income of 3xpress
"ransport without deducting the :1-
*nal withholding tax! Is the AI> correct?
3xplain! (,-) A+TERNATI1E ANSWER)
7es! "he term ".ross >eceipts" is broad
enough to include income constructively
received by the taxpayer! "he amount
withheld is paid to the government on its
behalf in satisfaction of withholding taxes!
"he fact that it did not actually receive the
amount does not alter the fact that it is
remitted in satisfaction of its tax
obligations! /ince the income withheld is
an income owned by 3xpress "ransport
the same forms part of its gross receipts
(CIR v. So*!d7a+B Co(.# G.R. No.
$.5$%$# Nove67e 34# 3//8'.
A+TERNATI1E ANSWER)
8o! "he term "gross receipts" as applied to
the business of a common carrier consists of
revenues from carriage of goods cargoes
and passengers! It does not comprehend or
include interest income which is properly
described as "Other Income!"
(NOTA BENE: This 7uestion pertains to a
percentage tax on #ross
$eceipts which is excluded
from the 3ar coverage)
2xc"usion (s) 'e&uction from 5ross Income (21)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
29 of 73
'istinguish "3xclusion from .ross
Income" from
"'eductions Irom .ross Income"! .ive an
example of each! (:-)
SUGGESTED ANSWER)
EXCLUSIONS 2o6 "o)) !+co6e refer
to a )ow of
wealth to the taxpayer which are not
treated as part of
gross income for purposes of computing
the taxpayerSs
taxable income due to the following
reasons: (4) It is exempted by the
fundamental lawC (:) It is exempted by
statuteC and (+) It does not come within the
de*nition of income! (/ection H4 >> 8o! :)!
DEDUCTIONS 2o6 "o)) !+co6e on the
other hand are the amounts which the law
allows to be deducted from gross income in
order to arrive at net income!
3xclusions pertain to the computation of
gross income while deductions pertain to
the computation of net income! 3xclusions
are something received or earned by the
taxpayer which do not form part of gross
income while deductions are something
spent or paid in earning gross income!
3xample of an exclusion from gross income
is proceeds of life insurance received by
the bene*ciary upon the death of the
insured which is not an income or 4+th
month pay of an employee not exceeding
&+1!111 which is an income not recogni$ed
for tax purposes! 3xample of a deduction is
business rental!
2xc"usions ; Inc"usions: Benefits on Account of In@ury
(1999)
<r! Infante was hit by a wayward bus while
on his way to
wor#! ?e survived but had to pay
&011!111!11 for his hospitali$ation! ?e was
unable to wor# for six months which meant
that he did not receive his usual salary of &
41111!11 a month or a total of
&H1!111!11! ?e sued the
bus company and was able to obtain a *nal
2udgment awarding him &011!111!11 as
reimbursement for his hospitali$ation
&H1!111 for the salaries he failed to receive
while hospitali$ed &:11111!11 as moral
damages for his pain and suFering and &
411111!11 as exemplary damages! ?e was
able to collect in full from the 2udgment!
?ow much income did he reali$e when he
collected on the 2udgment? 3xplain!
SUGGESTED ANSWER)
8one! "he &:11!111 moral and exemplary
damages are compensation for in2uries
sustained by <r! Infante! "he &011!111!11
reimbursement for hospitali$ation expenses
and the &H1!111!11 for salaries he failed
to receive are
Bamounts of any damages received
whether by suit or
agreement on account of such in2uries!B
/ection :=(b)(,) of the "ax (ode specifically
exclude these amounts from the gross income
of the individual in2ured! (/ection :=(b) 8I>(
and /ec! H+ >ev! >eg! 8o! :)
A+TERNATI1E ANSWER)
"he income reali$ed from the 2udgment is
only the recovery for lost salaries! "his
constitutes taxable income because were it
not for the in2ury he could have received it
from his employer as compensation
income! ;ll the other amounts received are
either compensation for in2uries or damages
received on account of such in2uriesB
which are exclusions from
gross income
pursuant to /ection :=(b)(,) of
the "ax (ode!
2xc"usions ; Inc"usions: 2xecuti(e Benefits
(1999)
<r! ;drian is an executive of a big
business corporation!
;side from his salary his employer
provides him with the following bene*ts:
free use of a residential house in an
exclusive subdivision free use of a
limousine and membership in a country
club where he can entertain customers
of the corporation! Which of these
bene*ts if any must <r! ;drian report as
income? 3xplain! SUGGESTED ANSWER)
<r! ;drian must report the imputed rental
value of the house and limousine as
income! If the rental value exceeds the
personal needs of <r! ;drian because he
is expected to provide accommodation in
said house for company guests or the car is
used partly for business purpose then <r!
;drian is entitled only to a ratable rental
value of the house and limousine as
exclusion from gross income and only a
reasonable amount should be reported as
income! "his is because the free housing
and use of the limousine are given partly
for the convenience and bene*t of the
employer (Co**ecto v). He+de)o+'.
A+TERNATI1E
ANSWER)
>emuneration for services although not
given in the form of cash constitutes
compensation income! ;ccordingly the
value for the use of the residential house is
part of his compensation income which he
must report for income tax purposes!
?owever if the residential house given to
<r! ;drian for his free use as an executive
is also used for the benefit of the
corporationOemployer such as for
entertaining customers of the
corporation only ,1- of the rental value
or depreciation (if the house is owned by
the corporation) shall form part of
compensation income (>;<O 4%=L)!
"he free use of a limousine and the
membership in a country club is not part of
<r! ;drianBs compensation income because
they were given for the bene*t of the
employer and are considered to be
necessary incidents for the proper
performance of his duties as an executive
of the corporation!
"he membership fee in the country club
needs to be reported as income! It
appears that the membership of <r!
;drian to the country club is primarily for
the bene*t and convenience of the
employer! "his is to enable <r! ;drian to
entertain company guests (Co**ecto
v). He+de)o+'.
2xc"usions ; Inc"usions$ Assets$ 8esi&ent A"ien (29)
>alph 'onald an ;merican citi$en was a
top executive of a E!/! company in the
&hilippines until he retired in
4JJJ! ?e came to li#e the &hilippines
so much that
following his retirement he decided to
spend the rest of his life in the country! ?e
applied for and was granted a permanent
resident status the following year! In the
spring of :110 while vacationing in
Orlando Ilorida E/; he suffered a heart
attac# and died! ;t the time of his death he
left the following properties: (a) ban#
deposits with (itiban# <a#ati and (itiban#
Orlando IloridaC (b) a resthouse in Orlando
IloridaC (c) a condominium unit in
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
*0 of 73
<a#atiC (d) shares of stoc# in the &hilippine
subsidiary of
the E!/! (ompany where he wor#edC (e)
shares of stoc# in /an <iguel (orp! and
&5O"C (f) shares of stoc# in 'isney World in
IloridaC (g) E!/! treasury bondsC and (g)
proceeds from a life insurance policy issued
by a E!/! corporation! Which of the
foregoing assets shall be included in the
taxable gross estate in the &hilippines?
3xplain! (,-) SUGGESTED ANSWER)
;ll of the properties enumerated except (g)
the proceeds from life insurance are
included in the taxable gross estate in the
&hilippines! >alph 'onald is considered a
resident alien for tax purposes since he is an
;merican (iti$en and was a permanent
resident of the &hilippines at the time of his
death! "he value of the gross estate of a
resident alien decedent shall be determined
by including the value at the time of his
death of all property real or personal
tangible or intangible wherever situated!
(/ec! =, 8I>()
"he other item (g) proceeds from a life
insurance policy may also be included on
the assumption that it was >alph 'onald
who too# out the insurance upon his own
life payable upon his death to his estate!
(/ec! =,Q3R 8I>()
2xc"usions ; Inc"usions$ Benefits on Account of 'eat#
(1996)
@ an employee of ;A( (orporation
died! ;A(
(orporation gave @Ss widow an amount
eDuivalent to @Ss
salary for one year! Is the amount
considered taxable income to the widow?
Why?
SUGGESTED ANSWER)
8o! "he amount received by the widow from
the decedentBs employer may either be a gift
or a separation benefit on account of death!
Aoth are exclusions from gross income
pursuant to provisions of /ection :=(b) of
the "ax (ode!
A+TERNATI1E ANSWER)
8o! /ince the amount was given to the
widow and not to the estate it becomes
obvious that the amount is more of a gift!
In one E!/! tax case (E)tate o2
He**)to6 v). Co66!))!o+e# 3. T.C. %$-)
it was held that payments to the widow of
the president of a corporation of the
amount the president would have received
in salary if he lived out the year constituted
a gift and not an income!
"he controlling facts which would lead to
the conclusion that the amount received by
the widow is not an income are as follows:
L) the gift was made to the widow
rather than the
estate:
=) there was no obligation for the
corporation to ma#e
further payments to the deceasedC
J) the widow had never wor#ed for the
corporationC
41) the corporation received no economic
benefitC and
44) the deceased had been fully
compensated for his services(E)tate
o2 S1d+e1 Cate v).
Co66!))!o+e# .48 F. 3d -$ (3dC!.
$%&$)!
2xc"usions ; Inc"usions$ Benefits on Account of In@ury
(29)
M> was a passenger of an airline that
crashed! ?e survived
the accident but sustained serious physical
in2uries which
reDuired hospitali$ation for +
months! Iollowing negotiations
with the airline and its insurer an
agreement
was reached under the terms of
which M> was
paid the following amounts:
&,11111!11 for his hospitali$ationC
&:,1111!11 as moral damagesC and
&+11111!11 for loss of income during the
period of his treatment and recuperation!
In addition M> received from his employer
the amount of &:11111!11 representing
the cash eDuivalent of his earned vacation
and sic# leaves! Which if any of the
amounts he received are sub2ect to
income tax? 3xplain! (,-)
SUGGESTED
ANSWER)
;ll amounts received from the airline
company are excluded from gross income!
Ender /ec! +:(A)(0) of the 8I>( amounts
of damages received whether by suit or
agreement on account of personal in2uries
or sic#ness are excluded from gross
income! /ince the amounts received from
the airline company were received as
damages by agreement on account of
personal in2uries all shall be excluded
from M>Bs gross income!
"he amount of &:11111!11 less the
eDuivalent of not more than 41 days of
vacation leave received by M> from his
employer is sub2ect to income tax under
/ec! :!L=!4 (a) (L) of >!>! 8o! :%J=!
2xc"usions ; Inc"usions$ !ompensation for persona"
in@uries or sicBness (24)
@ while driving home from his oFice
was seriously
in2ured when his automobile was bumped
from behind by
a bus driven by a rec#less driver! ;s a
result he had to pay &:11111!11 to his
doctor and &411 111!11 to the hospital
where he was con*ned for treatment! ?e
*led a suit against the bus driver and the
bus company and was awarded and paid
actual damages of &+11 111!11 (for his
doctor and hospitaliJation bills)
&411111!11 by way of moral damages and
&,1111!11 for what he had to pay his
attorney for bringing his case to court!
Which if any of the foregoing awards are
taxable income to @ and which are not?
3xplain! (=-)
SUGGESTED
ANSWER)
8othing is taxable! Ender the "ax (ode
any amount received as compensation for
personal in2uries or sic#ness plus the
amounts for any damages received
whether by suit or agreement on account
of such in2uries or sic#ness shall be
excluded from gross income! /ince the
entire amount of &0,1 111!11 received are
award of damages on account of the
in2uries sustainedC all shall be excluded
from his gross income! Obviously these
damages are considered by law as mere
return of capital! (/ection
+:(A)(0) 4JJL "ax
(ode)
2xc"usions ; Inc"usions$ Faci"ities or Pri(i"eges$ 0i"itary
!amp (1999)
(apt! (anuto is a member of the ;rmed
Iorces of the
&hilippines! ;side from his pay as
captain the government gives him free
uniforms free living Duarters in whatever
military camp he is assigned and free meals
inside the camp! ;re these bene*ts income
to (apt! (anuto? 3xplain!
SUGGESTED ANSWER)
8o the free uniforms free living Duarters
and the free meals inside the camp are not
income to (apt! (anute because these are
facilities or privileges furnished by the
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
*1 of 73
employer for the employerBs
convenience which are
necessary incidents to proper performance
of the military personnelBs duties!
2xc"usions ; Inc"usions$ 5ifts o(er an& a+o(e t#e
8etirement Pay (1999)
<r! Nuiro$ wor#ed as chief accountant of a
hospital for
forty%*ve years! When he retired at H,
he received
retirement pay eDuivalent to two monthsB
salary for every year of service as provided
in the hospital AI> approved retirement
plan! "he Aoard of 'irectors of the
hospital felt that the hospital should give
Nuiro$ more than what was provided for in
the hospitalBs retirement plan in view of his
loyalty and invaluable services for forty%*ve
yearsC hence it resolved to pay him a
gratuity of &4 <illion over and above his
retirement pay!
"he (ommissioner of Internal >evenue
taxed the &4 <il% lion as part of the gross
compensation income of Nuiro$ who
protested that it was excluded from income
because (a) it was a retirement pay and (b)
it was a gift!
4) Is <r! Nuiro$ correct in claiming that
the additional
&4 <illion was retirement pay
and therefore excluded from income?
3xplain!
:) Is <r! Nuiro$ correct in claiming that
the additional &4 <illion was gift and
therefore excluded from income?
3xplain!
SUGGESTED ANSWERS)
4) 8o! "he additional &4 million is not a
retirement pay but a part of the gross
compensation income of <r! Nuiro$! "his is
not a retirement bene*t received in
accordance with a reasonable private
benefit plan maintained by the employer as
it was not paid out of the retirement plan!
;ccordingly the amount
received in excess of the retirement
bene*ts that he is entitled to receive under
the AI>%approved retirement plan would
not Dualify as an exclusion from gross
income!
:) 8o! "he amount received was in
consideration of his loyalty and invaluable
services to the company which is clearly a
compensation income received on account
of employment! Ender the employerBs
Bmotivation testB emphasis should be placed
on the value of <r! Nuiro$ services to the
company as the compelling reason for
giving him the gratuity hence it should
constitute a taxable income! "he payment
would only Dualify as a gift if there is nothing
but Bgood will esteem and #indnessB which
motivated the employer to give the gratuity!
(Sto+to+ v). U.S.# $5- F. S0((. 8%8'. /uch is
not the case in the herein problem!
A+TERNATI1E ANSWER)
7es! "he 4 million is not compensation income
sub2ect to income tax but a gift from his
employer! "here was no evidence presented
to show that he was not fully compen% sated
for his 0, years of service! If his services
contributed in a large measure to the success
of the hospital it did not give rise to a
recoverable debt! "he &4 million is purely a
gratuity from the company! It is a taxable gift
to the transferor! Ender the "ax (ode gifts
are excluded from gross income therefore
exempt from income tax! (/ec!
:=Gb)(+) 8I>(C P!ova+o v).
Co66!))!o+e)
2xc"usions ; Inc"usions$ IT8$ 14t# mont#
pay
an& &e minimis +enefits
(29)
/tate with reasons the tax treatment of
the following in
the preparation of annual income tax
returns: 4+th month
pay and de
minimis bene*tsC
SUGGESTED
ANSWER)
"he $8t< 6o+t< (a1 not exceeding
&+1111!11 shall not
be reported in the income tax return
because it is excluded
from gross income (,ec. 5&A3@A'@ Ae@
N6$!) "he amount of the 4+th month pay
in excess of &+1111!11 shall be reported
in the annual income tax return!
De 6!+!6!) 7e+eFt) which do not
exceed the ceilings are excluded from
gross income and not to be considered for
determining the &+1111!11 ceiling
hence not reportable in the annual
income tax return! (,ec.
&.'/.%AA@A5@ $.$. &-*/ as amended by
,ec. &.55 A!@ and further amended by
$.$. No. /-&((()
2xc"usions ; Inc"usions$ IT8$ 'i(i&en&s recei(e& +y
a &omestic corporation (29)
/tate with reasons the tax treatment of
the following in
the preparation of annual income tax
returns: 'ividends
received by a domestic corporation
from (i) another domestic corporationC
and (ii) a foreign corporationC SUGGESTED
ANSWER)
(i) 'ividends received by a domestic
corporation from a domestic corporation
shall not be sub2ect to tax (/ec!
:LQ'RQ0R 8I>() hence excluded from
the income tax
ret
urn!
(ii) 'ividends received by a domestic
corporation from a foreign corporation
form part of the gross income and are
accordingly sub2ect to net income tax
hence included in the annual I"> (/ec!
0:Q;RQ:RQbR 8I>() hence must be
included in the income tax return!
2xc"usions ; Inc"usions$ IT8$ Income rea"i?e& from
sa"e
(2
9)
/tate with reasons the tax treatment of
the following in
the preparation of annual income tax
returns: Income reali$ed from sale of: (i)
capital assetsC and (ii) ordinary assets!
SUGGESTED ANSWER)
(i) Income reali$ed from sale of capital
assets is sub2ect to the *nal withholding tax
at source and therefore excluded from the
Income "ax >eturn (/ec! :0Q(R and Q'R
8I>()C
(ii) Income reali$ed from sale of ordinary
assets is part of
.ross Income included in the Income "ax
>eturn! (/ec!
+:Q;RQ+R
8I>()
2xc"usions ; Inc"usions$ IT8$ Interest on &eposits (29)
/tate with reasons the tax treatment of
the following in the preparation of annual
income tax returns: Interest on deposits
with: (i) A&I Iamily Aan#C and (ii) a
local oFshore ban#ing unit of a foreign
ban#C
SUGGESTED ANSWER)
Aoth items are excluded from the
income tax return:
(i) Interest income from any currency
ban# deposit is
considered passive income from sources
within the
&hilippines and sub2ect to *nal tax! /ince it
is sub2ect to
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
*2 of 73
*nal tax it is not to be included in the
annual I">! (/ec!
:0QARQ4R 8I>() (u) /ame
as 8o! (2)!
2xc"usions ; Inc"usions$ IT8$ Procee&s of "ife insurance
(29)
/tate with reasons the tax treatment of
the following in
the preparation of annual income tax
returns: &roceeds of life insurance
received by a child as irrevocable
beneficiaryC
SUGGESTED ANSWER)
8ot to be reported in the annual income tax
returns because the proceeds of the life
insurance are excluded from gross income!
&roceeds of 5ife insurance policies paid to
the heirs or bene*ciaries
upon the death of the insured is an
exclusion from gross income! (,ec.5&A3@
Al@N6$!)
2xc"usions ; Inc"usions$ /ife Insurance Po"icy (24)
On +1 Mune :111 @ too# out a life insurance
policy on his own life in the amount of
&:111111!11! ?e designated his wife 7
as irrevocable beneficiary to
&4111111!11 and his son K to the balance
of &4111111!11 but in the latter
designation reserving his right to substitute
him for another! On 14 /eptember :11+ @
died and his wife and son went to the
insurer to collect the proceeds of @Bs life
insurance policy! (=-)
(a) ;re the proceeds of the insurance
sub2ect to income tax on the part of 7
and K for their respective shares?
3xplain!
(b) ;re the proceeds of the insurance to
form part of
the gross estate of @?
3xplain!
SUGGESTED ANSWERS)
(a) 8o! "he law explicitly provides that
proceeds of life insurance policies paid to
the heirs or beneficiaries upon the death of
the insured are excluded from gross income
and is exempt from taxation! "he
proceeds of life insurance received upon
the death of the insured constitute a
compensation for the loss of life hence a
return of capital which is beyond the scope
of income taxation! (,ection 5&(3)(%) %**'
Tax !ode)
(b) Only the proceeds of &4111111!11
given to the son K shall form part of the
.ross 3state of @! Ender the "ax (ode
proceeds of life insurance shall form part
of the gross estate of the decedent to
the extent of the amount receivable by
the bene*ciary designated in the policy of
the insurance except when it is expressly
stipulated that the designation of the
bene*ciary is irrevocable! ;s stated in the
problem only the designation of 7 is
irrevocable while the insuredOdecedent
reserved the right to substitute K as
bene*ciary for another person! ;ccordingly
the proceeds received by 7 shall be excluded
while the proceeds received by K shall be
included in the gross estate of @! (,ect;on
/-(4) %**' Tax !ode)
2xemptions: !#arita+"e Institutions (2)
;rticle 6I /ection := (+) of the 4J=L
&hilippine
(onstitution provides that
charitable institutions
churches and personages or covenants
appurtenant thereto mosDues non%profit
cemeteries and all lands buildings and
improvements actually directly and
exclusively used for religious
charitable or
educational purposes shall be exempt
from taxation!
a) "o what #ind of tax does this
exemption apply? (:-)
SUGGESTED
ANS?ER:
"his exemption applies only to property
taxes! What is
exempted is not the institution itself but
the lands buildings and improvements
actually directly and exclusively used for
religious charitable and educational
purposes! (Co66!))!o+e o2 I+te+a*
Reve+0e v. Co0t o2 A((ea*)# et a*# G.R.
No. $3./.8# Octo7e $.# $%%5'.
b) Is proof of actual use necessary for
tax exemption purposes under the
(onstitution? (+-)
SUGGESTED
ANSWER)
7es because tax exemptions are strictly
construed against the taxpayer! "here
must be evidence to show that the taxpayer
has complied with the reDuirements for
exemption! Iurthermore real property
taxation is based on use and not on
ownership hence the same rule must also
be applied for real property tax
exemptions!
2xemptions: !#arita+"e Institutions$ !#urc#es
(1996)
"he (onstitution exempts from taxation
charitable in%
stitutions churches parsonages or
convents appurtenant thereto mosDues
arid non%pro*t cemeteries and lands
buildings and improvements actually
directly and exclu% sively used for religious
charitable and educational purposes!
<ercy ?ospital is a 411%bed hospital
organi$ed for charity patients! (an said
hospital claim exemption from taxation
under the above%Duoted constitutional
provision? 3xplain!
SUGGESTED
ANSWER)
7es! <ercy ?ospital can claim exemption
from taxation under the provision of the
(onstitution but only with respect to real
property taxes provided that such real
properties are used actually directly and
exclusively for charitable purposes!
2xemptions: 2&ucationa" institution
(2*)
/uppose that @7K (olleges is a
proprietary educational
institution owned by the ;rchbishopBs
family rather than the ;rchdiocese which
of those above cited income and donation
would be exempt from taxation? 3xplain
brie)y! (,-)
SUGGESTED ANSWER)
If @7K (olleges is a proprietary educational
institution all of its income from school
related and non%school related activities will
be sub2ect to the income tax based on its
aggregate net income derived from both
activities (/ection
:L(A) 8<()! ;ccordingly all of the income
enumerated
in the problem will be
taxable!
"he donation of lot and building will
li#ewise be sub2ect to the donorBs tax
because a donation to an educational
institution is exempt only if the school is
incorporated as a non%stoc# entity paying no
dividends!
/ince the donee is a proprietary
educational institution the donation is
taxable (/ection 414(;@+) 8M>()!
2xemptions: 5ifts ; 'onations (199*)
In 4JJ4 Imelda gave her parents a
(hristmas gift of &
411111!11 and a donation of &,1111!11
to her parish
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
** of 73
church! /he also donated a parcel of
land for the
construction of a building to the &E&
;lumni ;ssociation a non%stoc#
non%pro*t organi$ation!
&ortions of the building shall be leased to
generate income for the association!
4) Is the (hristmas gift of & 411111!11
to ImeldaBs parents sub2ect to tax?
:) ?ow about the donation to the
parish church?
+) ?ow about the donation to the &!E!&
;lumni ;sso%
ciatio
n?
SUGGESTED ANSWER)
4) "he (hristmas gift of &411111!11 given
by Imelda to her parents is taxable up to
&,1111!11 because under the law (,ec.
*& (a) of the Tax !ode) net
gifts not exceeding &,1111!11 are
exempt!
3' "he donation of &,1111!11 to the
parish church even assuming that it is
exclusively for religious purposes is not
tax%exempt because the exemption
granted under ;rticle 6I /ec! :=(+) of
the (onstitution applies only to real
estate taxes (L*adoc v. Co66!))!o+e#
$.SCRA3%3'.
+) "he donation to the &!E!&! ;lumni
;ssociation does not also Dualify for
exemption both under the (onstitution
and the aforecited law because it is not
an educational or research organi$ation
corporation institution foundation or
trust!
A+TERNATI1E ANSWER)
'onation to the &!E!&! ;lumni ;ssociation
is exempt from donorBs tax if it is proven
that the association is a nonstoc# non%pro*t
charitable association paying no dividends
governed by trustees who receive no
compensation and devoting all its income to
the accomplishment andpromotion
of the purposes
enumerated in its articles of incorporation!
8ot more than
+1- of the gift should be used for
administration
purposes by the
donee!
2xemptions: Dea& of t#e Fami"y: (199=)
;rnold who is single cohabits with 6ilma
who is legally
married to Kachary! ;rnold and 6ilma have
six minor children who live and depend
upon ;rnold for their chief support! "he
children are not married and not gainfully
employed!
4) Ior income tax purposes may ;rnold be
considered as "head of a family?" Q+-R
:) Is ;rnold entitled to deduct from his
gross income an additional exemption
for each of his illegitimate child? Q:-R
SUGGESTED ANSWER)
%) 7es! ;n unmarried man who has
illegitimate minor children who live with
him and depend upon him for their chief
support is considered as "head of the
family" ($$ No. &-*/ implementing
,ection 5- N6$!).
:) 8o! ;rnold is only entitled to deduct
additional
personal exemption for four (0) out of the
six (H) illegitimate children! "he
maximum number of dependents for
purposes of the additional personal
exemption is four! (/ec! +, 8I>()!
2xemptions: 7on:Profit 2&ucationa" Institutions (2)
Ender ;rticle @"6 /ection 0 (+)
of the 4J=L
&hilippine (onstitution all revenues and
assets of non% stoc# nonpro*t educational
institutions used actually directly and
exclusively for educational purposes are
exempt from taxes and duties! ;re income
derived from dormitories canteens and
boo#stores as well as interest income on
ban# deposits and yields from deposit
substitutes automatically exempt from
taxation? 3xplain! (,-)
SUGGESTED
ANSWER)
8o! "he interest income on ban# deposits
and yields from deposit substitutes are not
automatically exempt from taxation! "here
must be a showing that the incomes are
included in the schoolBs annual
information return and duly audited
*nancial statements together with:
4! (erti*cations from depository ban#s
as to the amount of interest income
earned from passive investments not
sub2ect to the :1- *nal withholding
taxC
:! (erti*cation of actual direct and
exclusive utili$ation of said income for
educational purposesC
+! Aoard resolution on proposed pro2ect
to be funded out of the money
deposited in ban#s or placed in money
mar#et placements (<inance
Bepartment Crder No. %"*-*- issued
November &" %**-) which must be
used actually directly and exclusively
for educational purposes!
"he income derived from dormitories
canteens and boo#stores are not also
automatically exempt from taxation! "here
is still the reDuirement for evidence to
show actual direct and exclusive use for
educational purposes! It is to be noted that
the 4J=L &hilippine (onstitution does not
distinguish with respect to the source or
origin of the income! "he distinction is with
respect to the use which should be actual
direct and exclusive for educational
purposes!
(onseDuently the provisions of /ec! +1 of
the 8I>( of
4JJL that a non%stoc# and nonpro*t
educational institution is exempt from
taxation only "in respect to income
received by them as such" could not aFect
the constitutional tax exemption! Where
the (onstitution does not distinguish with
respect to source or origin the "ax (ode
should not ma#e distinctions!
2xemptions: 7on:Profit 2ntity$ Anci""ary Acti(ity ;
Inci&enta" %perations (199*)
"he Eniversity of Aigaa a non%stoc#
non%pro*t entity
operates a canteen for its students and a
boo#store inside
the campus! It also operates two dormitories
for its students one of which is in the
campus! Is the Eniversity liable to pay
income taxes for the operation of the: 4)
canteen? :) boo#store? +) two
dormitories?
SUGGESTED ANSWER)
4) Ior the operation of the canteen inside
the campus the income thereon being
incidental to the operations of the Eniversity
as a school is exempt (Art. I62 (") (5)
!onstitution: B4!, $egulations No. %5'-/'
Bec. %. %*/').
:) Ior the same reasons the Eniversity of
Aigaa is not liable to pay income taxes
for the operation of the
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
*4 of 73
boo#store since this is an ancillary activity
the conduct of
which is carried out within the
school premises!
+) "he Eniversity of Aigaa shall not be
liable to pay income taxes for the operation
of the dormitory located in the campus for
same reasons as the foregoing! ?owever
the latter shall be liable for income taxes on
income from operations of the dormitory
located outside the school premises!
2xemptions: 7on:StocBE 7on:Profit Association (22)
@7K Ioundation is a non%stoc# non%pro*t
association duly organi$ed for religious
charitable and social welfare purposes! 5ast
Manuary + :111 it sold a portion of its lot
used for religious purposes and
utili$ed the entire proceeds for the
construction of a building to house its free
'ay and 8ight (are (enter for children
of single parents! In order to subsidi$e the
expenses of the 'ay and 8ight (are (enter
and to support its religious charitable and
social welfare pro2ects the Ioundation
leased the +11% sDuare meter area of the
second and third floors of the building for
use as a boarding house! "he Ioundation
also operates a canteen and a gift shop
within the premises all the income from
which is used actually directly and
exclusively for the purposes for which the
Ioundation was organi$ed!
;! (onsidering the constitutional provision
granting tax exemption to non%stoc#
corporations such as those formed
exclusively for religious charitable or
social welfare purposes explain the
meaning of the last paragraph of said
/ec! +1 of the 4JJL "ax (ode which
states that K6ncome of whatever >ind
and character of the foregoing
organiJations from any of their
properties real or personal or from any
of their activities conducted for proEt
regardless of the disposition made of
such income shall be sub1ect to tax
imposed under this !ode.0 (,-)
SUGGESTED ANSWER)
;! "he exemption contemplated in the
(onstitution covers real estate tax on real
properties actually directly and exclusively
used for religious charitable or social
welfare purposes! It does not cover
exemption from the imposition of the
income tax which is within the context of
/ection +1 of the "ax (ode! ;s a rule non%
stoc# non% pro*t corporations organi$ed for
religious charitable or social welfare
purposes are exempt from income tax on
their income received by them as such!
?owever if these religious charitable or
social welfare corporations derive income
from their properties or any of their activities
conducted for pro*t the income tax shall be
imposed on said items of income
irrespective of their disposition! (Sec. 8/#
NIRCA CIR v# DMCA# GR No. $3./.8#
$%%5)!
A! Is the income derived by @7K Ioundation
from the sale of a portion of its lot rentals
from its boarding house and the operation
of its canteen and gift shop sub2ect to tax?
3xplain! (,-)
SUGGESTED ANSWER)
A! 7es! "he income derived from the sale
of lot and rentals from its boarding house are
considered as income from properties which
are sub2ect to tax! 5i#ewise the income from
the operation of the canteen and gift shop
are income from its activities
conducted for
pro*t which are sub2ect to tax! "he income
tax attaches irrespective of the disposition
of these incomes! (Sec. 8/# NIRCA CIR v.
DMCA# GR No. $3./.8# $%%5)!
2xemptions: Pri?e of Peace Poster !ontest
(2)
Mose <iranda a young artist and designer
received a pri$e
of &411111!11 for winning in the on%
the%spot peace poster contest sponsored
by a local 5ions (lub! /hall the reward be
included in the gross income of the
recipient for tax purposes? 3xplain! (+-)
SUGGESTED
ANSWER)
8o! It is not includable in the gross
income of the recipient because the same
is sub2ect to a *nal tax of :1- the
amount thereof being in excess of
&41!111 (,ec.
&"(3)L%) N6$! of %**'). "he pri$e
constitutes a taxable income because it
was made primarily in recognition of
artistic achievement which he won due to
an action on his part to enter the contest!
A,ec. 5& (3) (') (c) N6$! of %**'@ /ince it
is an on%the%spot contest it is evident
that he must have 2oined the contest in
order to earn the pri$e or award!
2xemptions: Pri?es ; A1ar&s$ At#"etes
(1996)
Onyoc an amateur boxer won in a
boxing competition
sponsored by the .old (up Aoxing
(ouncil a sports
association duly accredited by the
&hilippine Aoxing ;ssociation! Onyoc
received the amount of &,11111 as his
pri$e which was donated by ;yala 5and
(orporation! "he AI> tried to collect
income tax on the amount received by
Onyoc and donorBs tax from ;yala 5and
(orporation which taxes Onyoc and ;yala
5and (orporation refuse to pay! 'ecide!
SUGGESTED
ANSWER)
"he pri$e will not constitute a taxable
income to Onyoc hence the AI> is not
correct in imposing the income tax! >!;!
8o! L,0J explicitly provides that B;ll pri$es
and awards granted to athletes in local and
international sports tournaments and
competitions held in the &hilippines or
abroad and sanctioned by their respective
national sports associations shall be
exempt from income tax"!
8either is the AI> correct in collecting the
donorBs tax from ;yala 5and (orporation!
"he law is clear when it categorically
stated ""hat the donorBs of said pri$es and
awards shall be exempt from the payment of
the donorBs tax!"
2xemptions: 8etirement Benefits: -orB Separation (1999)
; (o! a &hilippine corporation has two
divisions 9 manufacturing and construction!
'ue to the economic situation it had to
close its construction division and lay% oF
the employees in that division! ; (o! has a
retirement plan approved by the AI> which
reDuires a minimum of
,1 years of age and 41 years of service
in the same
employer at the time of retirement! "here
are : groups of employees to be laid oF:
4) 3mployees who are at least ,1 years of
age and has at 41 years of service at
the time of termination of employment!
:) 3mployees who do no meet either the
age or length
of service ; (o! plans to give the
following:
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
*. of 73
a! Ior category (;) employees % the benefits
under the AI> approved plan plus
an ex gratia payment of one
month of every year of service!
b! Ior category (A) employees % one
month for
every year of
service!
Ior both categories the cash
eDuivalent of
unused vacation and sic#
leave credits!
; (o! see#s your advice as to whether
or not it will sub2ect any of these
payments to W"! 3xplain your advice!
(,-)
SUGGESTED ANSWER)
Ior category A employees all the bene*ts
received on account of their separation are
not sub2ect to income tax hence no
withholding tax shall be imposed! "he
bene*ts received under the AI>%approved
plan upon meeting the service reDuirement
and age reDuirement are explicitly excluded
from gross income! "he ex gratia payment
also Duali*es as an exclusion from gross
income being in the nature of bene*t
received on account of separation due to
causes beyond the employeesB control!
(/ection +:(A) 8I>()! "he cash eDuivalent
of unused vacation and sic# leave credits
Duali*es as part of separation bene*ts
excluded from gross income (CIR v. Co0t
o2 A((ea*)# GR No. %-O$-# Octo7e $&#
$%%$)!
Ior category A employees all the benefits
received by them will also be exempt from
income tax hence not sub2ect to withholding
tax! "hese are benefits received on account
of separation due to causes beyond
the employeesB control which are
speci*cally excluded from gross income!
(,ection 5&(3) N6$!).
A+TERNATI1E ANSWER6
;ll of the payments are not sub2ect to
income tax and should not also be sub2ect to
withholding tax! "he employees were laid
oF hence separated for a cause beyond
their control! (onseDuently the amounts
to be paid by reason of such
involuntary separation are excluded from
gross income irrespective of whether the
employee at the time of separation has
rendered less than ten years of service
andOor is below *fty years of age! (,ection
5&(3) N6$!).
2xemptions: Separation Pay (199*)
&edro >eyes an oFicial of (orporation @
as#ed for an
"earlier retirement" because he was
emigrating to ;ustralia! ?e was paid
&:!111!111!11 as separation pay in
recognition of his valuable services to the
corporation!
Muan (ru$ another oFicial of the same
company was separated for occupying a
redundant position! ?e was given
&4111!111!11 as separation pay!
Mose Aautista was separated due to his failing
eyesight! ?e was given &,11!111!11 as
separation pay!
;ll the three (+) were not Duali*ed to
retire under the
AI>%approved pension plan of the
corporation!
4) Is the separation pay given to >eyes
sub2ect to income tax?
:) ?ow about the separation pay
received by (ru$?
+) ?ow about the separation pay received
by Aautista?
SUGGESTED
ANSWER)
4) "he separation pay given to >eyes
is sub2ect to income tax as compensation
income because it arises from a service
rendered pursuant to an employer%
employee rela% tionship! It is not
considered an exclusion from gross
income because the rule in taxation is tax
construed in strictissimi 1uris or the rule
on strict Interpretation of tax exemptions!
:) "he separation pay received by (ru$ is
not sub2ect to income tax because his
separation from the company was
involuntary (/ec! := b (L) "ax (ode)!
+) "he separation pay received by
Aautista is li#ewise not sub2ect to tax! ?is
separation is due to disability hence
involuntary! Ender the law separation
pay received through involuntary causes
are exempt from taxation!
2xemptions: Separation Pay
(1999)
<r! Macobo wor#ed for a manufacturing
*rm! 'ue to
business reverses the *rm offered
voluntary redundancy program in order to
reduce overhead expenses! Ender the
program an employee who oFered to
resign would be given separation pay
eDuivalent to his three monthBs basic
salary for every year of service! <r! Macobo
accepted the oFer and received
&011!111!11 as separation pay under the
program!
;fter all the employees who accepted the
oFer were paid the *rm found its
overhead still excessive! ?ence it adopted
another redundancy
program! 6arious
unpro*table departments were closed! ;s
a result <r! Uintanar was separated from
the service! ?e also received &011!111!11
as separation pay!
4) 'id <r! Macobo derive income when he
received his separation pay? 3xplain!
:) 'id <r! Uintanar derive income when
he received his separation pay? 3xplain!
SUGGESTED
ANSWER)
4) 7es <r! Macobo derived a taxable
income when he received his separation
pay because his separation from
employment was voluntary on his part in
view of his oFer to resign! What is
excluded from gross income is any
amount received by an oFicial or
employee as a conseDuence of
separation of such oFicial or employee
from the service of the employer for any
cause beyond the control of the said
oFicial or employee (/ec := 8I>()!
A+TERNATI1E ANSWER)
8o <r! Macobo did not derive any taxable
income because the separation pay was due
to a retrenchment policy adopted by the
company so that any employee terminated
by virtue thereof is considered to have been
separated due to causes beyond the
employeeBs control! "he voluntary
redundancy program reDuiring employees
to ma#e an oFer to resign is only
considered as a tool to expedite the lay%oF of
excess manpower whose services are no
longer needed by the employer but is not
the main reason or cause for the termination
SUGGESTED ANSWER)
:) 8o <r! Uintanar did not derive any
income when he received his separation
pay because his separation from
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
*6 of 73
employment is due to causes beyond his
control! "he
separation was involuntary as it was a
conseDuence of the closure of various
unpro*table departments pursuant to the
redundancy program!
2xemptions: Separation Pay (29)
(ompany ; decides to close its
operations due to
continuing losses and to terminate the
services of its employees! Ender the 5abor
(ode employees who are separated from
service for such cause are entitled to a
minimum of one%half month pay for every
year of service! (ompany ; paid the
eDuivalent of one month pay for every year
of service and the cash eDuivalent of unused
vacation and sic# leaves as separation
bene*ts!
;re such bene*ts taxable and sub2ect to
withholding tax
under the "ax (ode? 'ecide with
reasons! (,-)
SUGGESTED ANSWER)
;ll of the bene*ts are not taxable hence
they are not sub2ect to withholding tax
under the "ax (ode! Aene*ts received as a
conseDuence of separation for any cause
beyond the control of the employees such as
closure of business are excluded from gross
income. (,ec. 5&A3@A.@Ab@ N6$! in relation
to ,ec. &Ab@A&@ $.$. &-*/)
2xemptions: StocB 'i(i&en&s (24)
On 1+ Manuary 4JJ= @ a Iilipino citi$en
residing in the
&hilippines purchased one hundred (411)
shares in the capital stoc# of 7 (orporation
a domestic company! On
1+ Manuary :111 7 (orporation declared
out of the pro*ts of the company earned
after 14 Manuary 4JJ= a hundred
percent (411-) stoc#
dividends on all
stoc#holders of record as of +4 'ecember
4JJJ as a result of which @ holding in 7
(orporation became two hundred (:11)
shares! ;re the stoc# dividends received by
@ sub2ect to income tax? 3xplain! (=-)
SUGGESTED ANSWER)
8o! /toc# dividends are not reali$ed income!
;ccordingly the diFerent provisions of the
"ax (ode imposing a tax on dividend
income only includes within its purview cash
and property dividends ma#ing stoc#
dividends exempt from income tax!
?owever if the distribution of stoc#
dividends is the eDuivalent of cash or
property as when the distribution results
in a change of ownership interest of the
shareholders the stoc# dividends will be
sub2ect to income tax! (,ection &"(3)(&):
,ection &-(A)M(3): ,ection
&/(3)(-)(b) %**' Tax
!ode)
2xemptions: Strict"y !onstrue& (1996)
Why are tax exemptions strictly construed
against the
taxpaye
r?
SUGGESTED ANSWER)
"ax exemptions are strictly construed against
the taxpayer because such provisions are
highly disfavored and may almost be said to
be odious to the law (Ma+!*a E*ect!c
Co6(a+1 v). Vea# -& SCRA 84$)!
"he exception contained in the tax statutes
must be strictly construed against the one
claiming the exemption because the law does
not loo# with favor on tax exemptions they
being contrary to the life%blood theory which
is the underlying basis for taxes!
2xemptions: Termina" /ea(e Pay (1996)
; an employee of the (ourt of
;ppeals retired
upon reaching the compulsory age of H,
years! Epon compulsory retirement ;
received the money value of his
accumulated leave credits in the amount
of &,11!111!11! Is said amount sub2ect to
tax? 3xplain!
SUGGESTED
ANSWER)
8o! "he commutation of leave credits
more commonly #nown as terminal leave
pay i!e! the cash eDuivalent of
accumulated vacation and sic# leave
credits given to an oFicer or employee who
retires or separated from the service
through no fault of his own is exempt
from income tax! (BIR R0*!+" 385=%$
dated Nove67e 5# $%%$A Co66!))!o+e
v. CA a+d E2e+ Ca)ta+eda# GR No. %-/$-#
Octo7e $&# $%%$)!
2xemptions$ !#arita+"e Institutions
(26)
"he (onstitution provides
"charitable institutions churches
personages or convents appurtenant
thereto mosDues and non%pro*t
cemeteries and all lands buildings and
improvements actually directly and
exclusively used for religious charitable or
educational purposes shall be exempt from
taxation!" "his provision exempts
charitable institutions and religious
institutions from what #ind of taxes?
(hoose the best answer! 3xplain! (,-)
a! from all #inds of taxes i!e! income
6;" customs
duties local taxes and real
property tax b! from
local tax only
c! from value%
added tax
d! from real property
tax only
e! from capital gains
tax only
SUGGESTED
ANSWER)
"he provision exemptions charitable
institutions and religious institutions
from (d) >3;5 &>O&3>"7 ";@3/ only!
"he exemption is only for taxes assessed as
property taxes as distinguished from
excise taxes (CIR v. CA# CTA C DMCA#
G.R. No. $3./.8# Octo7e $.# $%%5A
L*adoc v. Co66!))!o+e o2 I+te+a*
Reve+0e# L=$%3/$# >0+e
$-#$
%-4'.
2xemptions$ 2&ucationa" institution
(2*)
@7K (olleges is a non%stoc# non%pro*t
educational
institution run by the ;rchdiocese of A&
(ity! It collected and received the
following:
(a) "uition
fees
(b) 'ormitory
fees
(c) >entals from canteen
concessionaires
(d) Interest from money%mar#et
placements of the
tuition
fees
(e) 'onation of a lot and building by
school alumni
Which of these above cited income and
donation would not be exempt from
taxation? 3xplain briefly! (,-) SUGGESTED
ANSWER)
;! ;ll of the income derived by the non%
stoc# nonpro*t educational institution will
be exempt from taxation provided they are
used actually directly and exclusively for
educational purposes! "he (onstitution
provides that all revenues and assets of
non%stoc# non%pro*t educational
institution which are actually directly and
exclusively used for educational purposes
are exempt from taxation (,ection "
par. 5 Article I62 %*/'
!onstitu
tion).
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
*2 of 73
"he donation is li#ewise exempt from the
donorBs tax if
actually directly and exclusively used for
educational purposes provided not more
than +1- of the donation is used by the
donee for administration purposes! "he
donee being a non%stoc# non%
pro*t educational institution is a Duali*ed
entity to receive an exempt donation sub2ect
to conditions prescribed by law (,ection "
par. " Art. I62 %*/' !onstitution in
relation to ,ection
%(%(AI5)
N)$!).
;ccordingly none of the cited income and
donation collected and received by the non%
stoc# non%pro*t educational institution
would not be exempt from taxation!
A+TERNATI1E ANSWER)
"he following receipts by the non%
stoc# nonpro*t educational institution are
not exempt from taxation vi$: (c) Re+ta*)
2o6 Ca+tee+ Co+ce))!o+a!e)! >ental
income is considered as unrelated to
the school operationsC hence taxable (BC<
Crder No. %5'-/' Bec. %.
%*/
')
(d) I+tee)t 2o6 6o+e1=6aBet
(*ace6e+t) o2 t<e t0!t!o+ 2ee). "he
interest on the placement is taxable
(BC< Crder No. %5'-/'). If however the
said interest is used actually directly and
exclusively for educational purposes as
proven by substantial evidence the same
will be exempt from taxation (CIR v. CA# 3%5
SCRA 58 $$%%5:H.
"he other items of income which were all
derived from school%related activities will
be exempt from taxation in the hands of
the recipient if used actually directly and
exclusively for educational purposes
(/ection 0 par! + ;rticle @"6 4J=L
(onstitution)!
"he donation to a non%stoc# non%profit
educational institution will be exempt from
the donorBs tax if used actually directly and
exclusively for educational purposes and
provided that not more than +1- of the
donation is used for administration purposes
(/ection 0 par! 0 ;rt! @M6 4J=L
(onstitution in relation to /ection
414(;<+) 8M>()!
2xemptions$ 2xemptions are <ni"atera" in 7ature (2*)
; law was passed granting tax
exemption to certain
industries and investments for a period of
*ve years! Aut three years later the law
was repealed! With the repeal the
exemptions were considered revo#ed by the
AI> which assessed the investing
companies for unpaid taxes effective on
the date of the repeal of the law!
8&( and U"> companies Duestioned the
assessments on the ground that having made
their investments in full reliance with the
period of exemption granted by the law its
repeal violated their constitutional right
against the impairment of the obligations and
contracts! Is the contention of the companies
tenable or not? >eason brie)y! (,-)
SUGGESTED ANSWER)
"he contention is not tenable! "he
exemption granted is in the nature of a
unilateral tax exemption! /ince the exemption
given is spontaneous on the part of the
legislature and no service or
duty or other
remunerative conditions have been
imposed on the taxpayers receiving the
exemption it may be revo#ed at will by
the legislature (C<!)t C<0c< v.
P<!*ade*(<!a# 3.
Ho,. 8// 9$5-/:)! What constitutes an
impairment of the
obligation of contracts is the revocation of
an exemption
which is founded on a valuable
consideration because it ta#es the form
and essence of a contract (Ca)a+ova) v.
Hod 5 P<!*. $34 9$%/&:A Ma+!*a
Ra!*oad Co6(a+1 v. I+)0*a Co**ecto
o2 C0)to6)# $3 P<!*. $.- 9$%$4:'
2xemptions$ 5o(6t BonusF 5iftsF ; A""o1ances
(199*)
In 'ecember 4JJ+ the /angguniang
Aayan authori$ed a
(hristmas bonus of &+111!11 a cash
gift of &,111!11 and transportation and
representation allowance of &H111!11 for
each of the municipal employees!
4) Is the (hristmas bonus sub2ect
to any tax?
:) ?ow about the
cash gift?
+) ?ow about the transportation and
representation
allowan
ces?
SUGGESTED
ANSWER)
4) "he (?>I/"<;/AO8E/ given by
the /angguniang Aayan to the
municipal employees is taxable as
additional compensation (/ec! :4 (a)!
"ax (ode)!
:) "he cash gift per employee of
&,!111!11 being substantial may be
considered taxable also! "hey parta#e
the nature of additional compensation
income as it is highly doubtful if
municipal governments are authori$ed
to ma#e gifts in substantial sums such
as this! "hey are not further% more
gifts of "small value" which employers
might give to their employees on
special occasions li#e (hristmas %
items which could be exempt under
AI> >evenue ;udit <emo 8o! 4%=L!
+) "he transportation and
representation allowances are
actually reimbursements for
expenses incurred by the employee for
the employer! /aid allowances spent
by the employee for the
employer are designed to enhance
the Duality of the service that the
employer is supposed to perform for
its clientele li#e the people of the
municipality!
2xemptions$ Persona" ; A&&itiona" 2xemption (26)
(harlie a widower has two sons by his
previous marriage! (harlie lives with Mane
who is legally married to <ario! "hey have
a child named Mill! "he children are all
minors and not gainfully employed!
$. Ho, 60c< (e)o+a* e@e6(t!o+ ca+
C<a*!e c*a!6I
E@(*a!+.
(3.4J'
SUGGESTED ANSWER)
(harlie can claim the personal exemption of
a ?ead of a Iamily or &:,111!11 provided
that at least one of his minor and not
gainfully employed children is unmarried
and living with and dependent upon him for
chief support (Tax $eform Act $A /"&"
!hapter 266 ,ection 5-AA@: 36$ $evenue
$egulation (&-*/).
3. Ho, 60c< add!t!o+a* e@e6(t!o+
ca+ C<a*!e c*a!6I E@(*a!+. (3.4J'
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
*4 of 73
SUGGESTED ANSWER)
?is children from his previous marriage who
are le% gitimate children and his illegitimate
child with Mane will all entitle him to
additional personal exemption of &=111!11
for each dependent if apart from being
minor and not gainfully employed they are
unmarried living with and dependent upon
(harlie for their chief support (Tax
$eform Act $A/"&" !hapter 2=
,ection 5-(A): 36$ $evenue $egulation (&-
*/).
2xemptions$ 8oman !at#o"ic !#urc#$ /imitations (29)
"he >oman (atholic (hurch owns a :%
hectare lot in a town in "arlac province!
"he southern side and middle part are
occupied by the (hurch and a convent
the eastern side by a school run by the
(hurch itself the southeastern side by
some commercial establishments while
the rest of the property in
particular the northwestern side is idle or
unoccupied!
<ay the (hurch claim tax exemption on
the entire land?
'ecide with
reasons!
SUGGESTED ANSWER)
8o! "he (hurch cannot claim tax exemption
on the entire land! Only the southern side
and middle part that are occupied by the
(hurch and a convent and the eastern
side occupied by a school run by the (hurch
itself are exempt because such parts of
the :%hectare lot are actually directly and
exclusively used for religious and
educational purposes! (,ec.
&/A5@ Art. 26 %*/'
!onstitution: ,ec. &5" ?ocal
#overnment !ode)
"he southeastern side occupied by some
commercial establishment is not tax
exempt! If real property is used for one or
more commercial purposes it is not
exclusively used for the exempted purpose
but is sub2ect to taxation!
B/olelyB is synonymous with Bexclusively!B
(L0+" Ce+te o2 t<e P<!*!((!+e) v. K0eGo+
C!t1# G.R. No. $..$/.# >0+e 3%#
3//.' "he property must be exclusively
(solely) used for religious or educational
purposes!
Of course it is apparent that the
northwestern side which is idle or
unoccupied is not "actually directly and
exclusively" used for religious or
educational purposes hence not exempt
from taxation!
CAPITA+ GAIN TAX
!apita" Asset (s) %r&inary Asset (24)
'istinguish a "capital asset" from an
"ordinary asset"!
SUGGESTED ANSWER)
(a) "he term "capital asset" regards all
properties not specifically excluded in the
statutory de*nition of capital assets the
profits or loss on the sale or the exchange of
which are treated as capital gains or capital
losses! (onversely all those properties
specifically excluded are considered as
ordinary assets and the profits or losses
reali$ed must have to be treated as ordinary
gains or ordinary losses! ;ccordingly
"Ca(!ta* A))et)" includes property held by
the taxpayer whether or not connected with
his trade or business but the term does not
include any of the following which are
conseDuently considered "ordinary assets":
(4) stoc# in trade of the taxpayer or other
property of
a #ind which would properly be
included in the
inventory of the taxpayer if on hand
at
the close of the taxable yearC
(:) property held by the taxpayer
primarily for sale to customers in the
ordinary course of trade or businessC
(+) property used in the trade or
business of a character which is
sub2ect to the allowance for
depreciation provided in /ection +0
(I) of the "ax (odeC or
(0) real property used in trade or
business of the taxpayer!
"he statutory de*nition of "capital assets"
practically excludes from its scope it will
be noted all property held by the taxpayer
if used in connection with his trade or
business!
!apita" 5ain Tax$ 7ature
(21)
; a doctor by profession sold in the year
:111 a parcel of land which he bought as a
form of investment in 4JJ1 for &hp 4
million! "he land was sold to A his
colleague at a time when the real estate
prices had gone down and so the land was
sold only for &hp =11111 which was then
the fair mar#et value of the land! ?e used
the proceeds to *nance his trip to the
Enited /tates! ?e claims that he should not
be made to pay the H- *nal tax because he
did not have any actual gain on the sale! Is
his contention correct? Why? (,-)
SUGGESTED
ANSWER)
8o! "he H- capital gains tax on sale of a
real property held as capital asset is
imposed on the income presumed to have
been reali$ed from the sale which is
the fair mar#et value or selling price
thereof whichever is higher! (/ection
:0(') 8I>()! ;ctual gain is not reDuired
for the imposition of the tax but it is the
gain by *ction of law which is taxable!
%r&inary Sa"e of a !apita" Asset
(199*)
8oel 5angit and his brother Movy bought a
parcel of land
which they registered in their names as
pro%indiviso owners (&arcel ;)!
/ubseDuently they formed a
partnership duly registered with
/ecurities and 3xchange (ommission
which bought another parcel of land
(&arcel A)! Aoth parcels of land were sold
reali$ing a net pro*t of &4111111!11 for
parcel ; and &,11!111!11 for parcel A!
"he AI> claims that the sale of parcel ;
should be taxed as a sale by an
unregistered partnership! Is the AI>
correct?
SUGGESTED ANSWER)
"he AI> is not correct since there is no
showing that the acDuisition of the property
by 8oel and Movy 5angit as pro indiviso
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! "he
sale of parcel ; shall therefore not be
treated as a sale by an unregistered
partnership but an ordinary sale of a
capital asset and hence will be sub2ect
to the ,- capital gains tax and
documentary
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
*9 of 73
stamp tax on transfers of real property
said taxes to be
borne eDually by the co%
owners!
A+TERNATI1E ANSWER)
"he AI> is correct in treating the gain from
the sale of parcel of land by 8oel and Movy
5angit at a pro*t of &4111111!11! In the
case of Pa)c0a* a+d Da"o+ v.
Co66!))!o+e# G.R. No. &5$88# Octo7e
$5# $%55 the /upreme (ourt ruled that
the sharing of returns does not in itself
establish a partnership whether or not
the persons sharing therein have a 2oint or
common right or interest in the property!
"he decision in said case cannot be applied
here because clearly the parties
organi$ed a partnership duly registered
with the /ecurities and 3xchange
(ommission! "hey pooled their
resources together with the purpose of
dividing the pro*t between them!
Sa"es of S#are of StocBs: !apita" 5ains Tax 8eturn (1999)
?U (o! is a ?ong Uong corporation not
doing business in the &hilippines! It holds
01- of the shares of ; (o! a &hilippine
company while the H1- is owned by & (o!
a Iilipino%owned &hilippine corporation! ?U
(o! also owns
411- of the shares of A (o! an
Indonesian company
which has a duly licensed &hilippine branch!
'ue to worldwide restructuring of the ?U
(o! group ?U (o! decided to sell all its
shares in ; and A (os! "he negotiations for
the buy%out and the signing of the
;greement of /ale were all done in the
&hilippines! "he ;greement provides that
the purchase price will be paid to ?U (oBs
ban# account in the E! /! and that little to ;
and A (os! /hares will pass from ?U (o! to
& (o! in ?U where the stoc# certi*cates will
be delivered! & (o! see#s your advice as to
whether or not it will sub2ect the payments
of purchase price to Withholding "ax!
3xplain your advice! (41-)
SUGGESTED ANSWER)
& (o! should not sub2ect the payments of
the purchase price to withholding tax!
While the seller is a non%resident foreign
corporation which is not normally reDuired
to *le returns in the &hilippines
therefore ordinarily all its income earned
from &hilippine sources is taxed via the
withholding tax system this is not the
procedure availing with respect to sales of
shares of stoc#! "he capital gains tax on
the sale of shares of stoc# of a
domestic corporation is always reDuired to
be paid through a capital gains tax return
*led! "he sale of the shares of stoc# of the
Indonesian (orporation is not sub2ect to
income tax under our 2urisdiction because
the income derived there from is considered
as a foreign%sourced income! A+TERNATI1E
ANSWER)
7es but only on the shares of stoc#s of ;
(o! and only on the portion of the purchase
price which constitutes capital gains! Ender
the "ax (ode of 4JJL the capital gains tax
imposed under /ection :=(A)(,)(c) is
collectible via the withholding of tax at
source pursuant to /ection ,L of the same
(ode!
(8ote: "he bar candidate might have
relied on the provision of the "ax (ode
of 4JJL which provides that the capital
gains tax is imposed as withholding
taxes (/ection ,L 8I>()! "his
procedure is impractical and therefore
not followed in practice because the
buyerO withholding agent will not be in a
position to determine how much income is
reali$ed by
the seller from the sale! Ior this
reason any
of the foregoing suggested answers
should be given full credit)!
Tax Basis: !apita" 5ains: 0erger of !orporations
(199*)
In a Dualified merger under /ection +0 (c)
(:) of the "ax
(ode what is the tax basis for computing
the capital gains on: (a) the sale of the
assets received by the surviving
corporation from the absorbed corporationC
and (b) the sale of the shares of stoc#
received by the stoc#holders from the
surviving corporation?
SUGGESTED
ANSWER)
In a Dualified merger under /ection +0 (c)
(:) of the "ax
(ode the tax basis for computing the
capital gains on:
(a) the sale of the assets received by the
surviving corporation from the
absorbed corporation shall be the
originalOhistorical cost of the assets
when still in the hands of the absorbed
corporation!
(b) the sale of the shares of stoc# received
by the stoc#holders from the surviving
corporation shall be the
acDuisitionOhistorical cost of assets
transferred to the surviving
corporation!
Tax Basis: !apita" 5ains: Tax:Free 2xc#ange of
Property
(199
*)
In a Dualified tax%free exchange of
property for shares
under /ection +0 (c) (:) of the "ax (ode
what is the tax
basis for computing the capital gains on:
(a) the sale of the assets received by the
(orporationC and (b) the sale of the shares
received by the stoc#holders in
exchange of the assets?
SUGGESTED
ANSWER)
In a Duali*ed tax free exchange of property
for shares under /ection +0 (c) (:) of the
"ax (ode the tax basis for computing the
gain on the:
(a) sale of the assets received by the
corporation shall be the
originalOhistorical cost (purchase price
plus expenses of acDuisition) of the
propertyO assets given in exchange of
the shares of stoc#!
(b) sale of the shares of stoc#
received by the stoc#holders in
exchange of the assets shall be the
originalOhistorical cost of the property
given in exchange of the shares of
stoc#!
A+TERNATI1E ANSWER)
"he basis in computing capital gains tax in a
Duali*ed tax% free exchange under /ec! +0
(c) (:) is:
(a) With respect to the asset received by
the corporation the same as it would be
in the hands of the transferor increased
by the amount of the gain recogni$ed
to the transferor on the transfer!
(b) With respect to the shares
received by the stoc#holders in
exchange of the assets % the same as the
basis of the property stoc# or securities
exchanged decreased by the money
received and the fair mar#et value of the
other property received and increased
by the amount treated as dividend of the
shareholder and the amount of any
gain that was recogni$ed on the
exchange!
CORPORATION - PARTNERS/IP
Ba& 'e+ts$ Factors$ 2"ements t#ereof (2*)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
40 of 73
&N> (orp! claimed as a deduction in its tax returns the
amount of &4111111 as bad debts! "he
corporation was assessed by the
(ommissioner of Internal >evenue for
deficiency taxes on the ground that the
debts cannot be considered as "worthless"
hence they do not Dualify as bad debts!
"he company as#s for your advice on
"What factors will held in determining
whether or not the debts are bad debts?"
;nswer and explain briefly! (,-) SUGGESTED
ANSWER)
In order that debts be considered as bad
debts because they have become worthless
the taxpayer should establish that during
the year for which the deduction is sought a
situation developed as a result of which it
became evident in the exercise of sound
ob2ective business 2udgment that there
remained no practical but only vaguely
theoretical prospect that the debt would
ever be paid (Co**ecto o2 I+te+a*
Reve+0e v. Good!c< I+te+at!o+a* R077e
Co.# 3$
SCRA $88- 9$%-&:'. "Worthless" is not
determined by an
in)exible formula or slide rule calculation
but upon the exercise of sound business
2udgment! "he factors to be considered
include but are not limited to the following:
4! "he debtor has no property nor
visible incomeC
:! "he debtor has been ad2udged
ban#rupt or insolventC
+! (ollateral shares have become
worthlessC and
0! "here are numerous debtors with small
amounts of
debts and further action on the
accounts would entail expenses
exceeding the amounts sought to be
collected!
A+TERNATI1E ANSWER)
"he following are the factors to be
considered in determining whether or not
the debts are bad debts:
4! "he debt must be valid and
subsistingC
:! "he debt is connected with the
taxpayerBs trade or business and is not
between related partiesC
+! "here is an actual ascertainment
that the debt is worthlessC and
0! "he debt is charged%oF within the
taxable year!
(PRC v. CA# 34- SCRA --& 9$%%-:A
Reve+0e Re").
No. 4=
%%'.
!on&ominium !orp)$ Sa"e of !ommon Areas (199*)
@%land (ondominium (orporation was
organi$ed by the owners of units in @%land
Auilding in accordance with the <aster
'eed with 'eclaration of >estrictions! "he @%
land Auilding (orporation the developer of
the building conveyed the common areas in
favor of the @%land (ondominium (orporation!
Is the conveyance sub2ect to any tax?
SUGGESTED ANSWER)
"he conveyance is not sub2ect to any tax! "he
same is without consideration and not in
connection with a sale made to @%land
(ondominium (orporation and the purpose
of the conveyance to the latter is for the
management of the common areas for the
common benefit of the unit owners!
"he same is not sub2ect to income tax since
no income was reali$ed as a result of the
conveyance which was made pursuant to
the (ondominium ;ct (>!;! 8o! 0H:H and the
purpose of which was merely to vest title to
the common areas in favor of the 5and
(ondominium (orporation!
"here being no monetary consideration
neither is the conveyance sub2ect to the
creditable withholding tax im% posed under
>evenue >egulations 4%J1 as amended!
"he second conveyance was actually no
conveyance at all because when the units
were sold to the various buyers the
common areas were already part and
parcel of the sale of said units pursuant
to the (ondominium ;ct! ?owever the
'eed of (onveyance is sub2ect to
documentary stamp tax!
N.3. Bocumentary stamps tax and
!ondominium ?aw are excluded from
the coverage of the 3ar 4xaminations.
!orporation$ Sa"e$ !re&ita+"e -it##o"&ing Tax
(199*)
8oel 5angit and his brother Movy bought a
parcel of land which they registered in
their names as pro%indiviso owners
(&arcel ;)! /ubseDuently they formed
a partnership duly registered with
/ecurities and 3xchange (ommission
which bought another parcel of land
(&arcel A)! Aoth parcels of land were sold
reali$ing a net pro*t of &4111111!11 for
parcel ; and &,11!111!11 for parcel A!
"he AI> also claims that the sale of
parcel A should be taxed as a sale by a
corporation! Is the AI> correct? SUGGESTED
ANSWER)
"he AI> is correct since a "corporation" as
de*ned under /ection :1 (a) of the "ax
(ode includes partnerships no matter
how created or organi$ed except general
profes% sional partnerships! "he business
partnership in the in% stant case shall
therefore be taxed in the same manner as
a corporation on the sale of parcel A! "he
sale shall thus be sub2ect to the
creditable withholding tax under
>evenue >egulations 4%J1 as amended
by 4:%J0 on the sale of parcel A and the
partnership shall report the gain reali$ed
from the sale when it *les its income tax
return! 'i(i&en&s: -it##o"&ing Tax (1999)
?U (o! is a ?ong Uong company which
has a duly
licensed &hilippine branch engaged in
trading activities in the &hilippines! ?U (o!
also invested directly in 01- of the shares
of stoc# of ; (o! a &hilippine corporation!
"hese shares are boo#ed in the ?ead
OFice of ?U (o! and are not reflected as
assets of the &hilippine branch! In
4JJ= ; (o! declared dividends to its
stoc#holders! Aefore
remitting the dividends to ?U (o! ;
(o! see#s your advice as to whether it will
sub2ect the remittance to W"! 8o need to
discuss W" rates if applicable! Iocus your
discussion on what is the issue! (41-)
SUGGESTED ANSWER)
I will advise ; (o! to withhold and remit the
withholding tax on the dividends! While
the general rule is that a foreign
corporation is the same 2uridical entity
as its branch oFice in the &hilippines
when however the corporation transacts
business in the &hilippines directly and
independently of its branch the taxpayer
would be the foreign corporation itself and
sub2ect to the dividend tax similarly imposed
on non%resident foreign corporation! "he
dividends attributable to the ?ome Of*ce
would not Dualify as dividends earned by a
resident foreign corporation which is
exempt from tax! (Ma07e+! Co(oat!o+ v.
Co66!))!o+e# GR No. &-4&8# Se(te67e
$.#
$%5%'.
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
41 of 73
special tax rates! /o is with &3K;
enterprises
2ffect: 'isso"ution$ !orporate 2xistence (2*)
Ior failure to comply with certain corporate
reDuirements the stoc#holders of ;A(
(orp! were noti*ed by the /ecurities and
3xchange (ommission that the corporation
would be sub2ect to involuntary
dissolution! "he stoc#holders did not do
anything to comply with the
reDuirements and the corporation was
dissolved! (an the stoc#holders be held
personally liable for the unpaid taxes of the
dissolved corporation? 3xplain brie)y! (,-)
SUGGESTED ANSWER)
8o! ;s a general rule stoc#holders cannot
be held personally liable for the unpaid
taxes of a dissolved corporation! "he rule
prevailing under our 2urisdiction is that a
corporation is vested by law with a
personality that is separate and distinct
from those of the persons composing it
(S0+!o v. NLRC# $3& SCRA 8%/L$%5.:H.
8O"3: additional point should be
given to the
examinee if he answers in the
following that: ?owever stoc#holders
may be held liable for the unpaid
taxes of a dissolved corporation if it
appears that the corporate assets
have passed into their hands (Ta+
T!o+" B!o v. CFR# . SCRA
%5- 9$%-3:'. 5i#ewise when
stoc#holders have
unpaid subscriptions to the capital of
the corporation they can be made
liable for unpaid taxes of the
corporation to the extent of their
unpaid subscriptions!
0inimum !orporate Income Tax (21)
What is the rationale of the law in
imposing what is
#nown as the <inimum (orporate
Income tax on
'omestic
(orporations? (+-)
SUGGESTED ANSWER)
"he imposition of the <inimum (orporate
Income "ax (<(I") is designed to forestall
the prevailing practice of corporations of
over claiming deductions in order to
reduce their income tax payments! "he
*ling of income tax returns showing a tax
loss every year goes against the business
motive which impelled the stoc#holders
to form the corporation! "his is the reason
why domestic corporations (and resident
foreign corporations) after the recovery
period of four years from the time they
commence business operations they
become liable to the <(I" whenever this tax
imposed at :- of gross income exceeds the
normal corporate income tax imposed on
net income! (/ponsorship /peech
(hairman of /enate Ways and <eans
(ommittee)!
0inimum !orporate Income Tax$ 2xemption (21)
Is a corporation which is exempted from
the minimum
corporate income tax automatically
exempted from the regular corporate income
tax? 3xplain your answer! (:-) SUGGESTED
ANSWER)
8o! "he minimum corporate income tax is a
proxy for the normal corporate income tax
not the regular corporate income tax paid by
a corporation! Ior instance a proprietary
educational institution may be sub2ect to a
regular corporate income tax of 41-
(depending on its dominant income) but it is
exempt from the imposition of <(I"
because the latter is not intended to
substitute
(';
enterprises
etc!
Q8ote: If what is meant by regular
income tax is the
+:- tax rate imposed on taxable
income of corporations the answer
would be in the af*rmative because
domestic corporations and resident
foreign corporations are either liable
for the :- of gross income (<(I")
or +:- of net income (the normal
corporate income tax) whichever is
higher!R
A+TERNATI1E
ANSWER)
8o! ; corporation which is exempted from
the minimum corporate income tax is not
automatically exempted from the regular
corporate income tax! "he reason for this
is that <(I" is imposed only beginning
on the fourth taxable year immediately
following the year in which such
corporation commenced its business
operations! "hus a corporation may be
exempt from <(I" because it is only on
its third year of operations
following its commencement of
business operations!
ESTATE - DONOR0S
TAXES
'onor6s Tax: 2"ection !ontri+utions
(199=)
;re contributions to a candidate in an
election sub2ect to
donorBs tax? On the part of the contributor
is it allowable as a deduction from gross
income? Q,-M
SUGGESTED
ANSWER)
4) 8o provided the recipient candidate
had complied with the reDuirement for
*ling of returns of contri% butions with
the (ommission on 3lections as
reDuired under the Omnibus 3lection
(ode!
:) "he contributor is not allowed to
deduct the contributions because
the said expense is not directly
attributable to the
development management
operation andOor conduct of a trade
business or profession L,ec.
5"AA)(l)(a) N6$!)! Iurthermore if
the candidate is an incumbent
government of*cial or employee it
may even be considered as a bribe or
a #ic#bac# (/ec! +0Q;M(l)(c) 8I>()!
COMMENT: It is suggested that full
credit should be given for any answer
to the *rst Duestion because the
answer reDuires an interpretation of
the 3lection (ode! &ursuant to the
provisions of /ection JJ(() of the 8I>(
the taxability of this type of
contributionsOdonations is governed by
the 3lection (ode!
'onor6s Tax$ Basis for 'etermining 5ain (1999)
(4) Uenneth 7usoph owns a commercial
lot which he
bought many years ago for &4
<illion! It is now
worth &:1 <illion although the $onal
value is only &4, <illion! ?e
donates one%half pro%indiviso interest
in the land to his son 'ino on +4
'ecember
4JJ0 and the other one%half pro%
indiviso interest to
the same son on :
Manuary 4JJ,!
?ow much is the value of the gifts in 4JJ0
and 4JJ, for
purposes of computing the gift
tax? 3xplain!
SUGGESTED ANSWER)
4) "he value of the gifts for purposes of
computing the gift tax shall be &L!,million
in 4JJ0 and &L!,million in
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
42 of 73
4JJ,! In valuing a real property for gift tax
purposes the
property should be appraised at the higher
of two values as of the time of donation
which are (a) the fair mar#et value as
determined by the (ommissioner (which is
the $onal value *xed pursuant to /ection
4H(e) of the "ax (ode) or (b) the fair
mar#et value as shown in the schedule of
values *xed by the &rovincial and (ity
;ssessors! "he fact that the property is
worth &:1 million as of the time of donation
is immaterial unless it can be shown that
this value is one of the two values
mentioned as provided under /ection =4 of
the "ax (ode!
(:) "he >evenue 'istrict Of*cer Duestions
the splitting of the donations into 4JJ0
and 4JJ,! ?e says that since there were
only two (:) days separating the two
donations they should be treated as one
having been made within one year! Is he
correct? 3xplain!
SUGGESTED ANSWER)
:) "he >evenue 'istrict OFicer is not
correct because the computation of the gift
tax is cumulative but only insofar as gifts
made within the same calendar year!
"herefore there is no legal 2usti*cation for
treating two gifts effected in two separate
calendar years as one gift!
(+) 'ino subseDuently sold the land to a
buyer for & :1
<illion! ?ow much did 'ino gain on
the sale? 3xplain!
SUGGESTED ANSWER)
+) 'ino gained an income of 4J million
from the sale! 'ino acDuires a carry%over
basis which is the basis of the property in
the hands of the donor or &4 million! "he
gain from the sale or other disposition of
property shall be the excess of the amount
reali$ed therefrom over the basis or
ad2usted basis for determining gain (/ec!
+0(a) 8I>()! /ince the property was
acDuired by gift the basis for determining
gain shall be the same as if it would be in
the hands of the donor or the last preceding
owner by whom the property was not
acDuired by gift! ?ence the gain is
computed by deducting the basis of &4
million from the amount reali$ed which is
&:1 million!
(0) /uppose instead of receiving the lot by
way of donation 'ino received it by
inheritance! What would be his gain
on the sale of the lot for &:1
<illion? 3xplain!
SUGGESTED ANSWER)
0) If the commercial lot was received by
inheritance the gain from the sale for &:1
million is &, million because the basis is the
fair mar#et value as of the date of acDuisition!
"he stepped%up basis of &4, million which is
the value for estate tax purposes is the basis
for determining the gain (/ec! +0(b)(:)
8I>()!
A+TERNATI1E ANSWER)
If 'ino held on to the property as a capital
asset in that it is neither for sale in the
ordinary course of business nor used in 'inoBs
business then upon sale thereof there is
presumed to be reali$ed an income of &:1
million which is the gross selling price of
the property! (/ec! :4(e) 8I>()! "he same
would be sub2ect to the ,- capital gains
tax!
'onor6s Tax$ 'acion en Pago$ 2ffect: Taxation (199,)
;n insolvent company had an
outstanding
obligation of & l11111!11 from a creditor!
/ince it could not pay the debt the
creditor agreed to accept payment through
dacion en pago a property which had a
mar#et value of &+1!111!11! In the dacion
en pago document the balance of the debt
was condoned!
;! What is the tax eFect on the
discharge of the unpaid
balance of the obligation on the debtor
corporation? A! Insofar as the creditor
is concerned how is he
effected tax%wise as a conseDuence of the
transaction?
SUGGESTED
ANSWERS)
(a) "he condonation of the unpaid balance
of the obligation has the eFect of a
donation made on the part of the
creditor! It is obvious that the creditor
merely desires to benefitthe debtor
and without any
consideration therefore cancels the debt
the amount of the debt cancelled is a gift
from the creditor to the debtor and need
not be included in the latterBs gross
income (/ec!
,1 >>
8o! :)C
(b) Ior the diFerence of &L1111 the
creditor shall be sub2ect to donorBs tax at
the applicable rates provided for under the
8ational Internal >evenue (ode!
A+TERNATI1E
ANSWER)
(a) If the discharge was prompted by the
insolvency of the debtor company then it
is a clear case of a write%off of a bad debts
which has no tax conseDuence to the
debtor!
(b) "he write%oF of the bad debt will
entitle the creditor to claim the same as a
deduction from its gross income!
'onor6s Tax$ 'onation to a Si+"ing
(21)
7our bachelor client a Iilipino residing in
Nue$on (ity
wants to give his sister a gift of &hp
:11111!11! ?e see#s your advice for
purposes of reducing if not eliminating
the donorBs tax on the gift on whether it is
better for him to give all of the &hp
:11111!11 on (hristmas :114 or to give
&hp 411111!11 on (hristmas:114 and the
other &hp
411111!11 on Manuary 4 :11:! &lease
explain your advice!
(,
-
)
SUGGESTED ANSWER)
I would advice him to split the donation!
.iving the &hp:11111 as a one%time
donation would mean that it will be sub2ect
to a higher tax brac#et under the graduated
tax structure thereby necessitating the
payment of donorBs tax! On the other hand
splitting the donation into two eDual
amounts of &hp 411111 given on two
diFerent years will totally relieve the donor
from the donorSs tax because the *rst
&hpl11!111 donation in the graduated
brac#ets is exempt! (/ection JJ 8I>()!
While the donorSs tax is computed on the
cumulative donations the aggregation of all
donations made by a donor is allowed only
over one calendar year!
'onor6s Tax$ 'onation to 7on:StocBF 7on:Profit Pri(ate
2&ucationa" Institutions (2)
What conditions must occur in order
that all grants donations and
contributions to non%stoc# non%pro*t
private educational institutions may be
exempt from the donorBs tax under /ection
414 (a) of the "ax (ode? (+-) SUGGESTED
ANSWER)
"he following are the
conditions:
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
4* of 73
4! 8ot more than thirty percent (+1-)
of said gifts
shall be used by such donee for
administration purposesC
:! "he educational institution is
incorporated as a non% stoc# entity
+! paying no
dividends
0! governed by trustees who receive no
compensation
an
d
,! devoting all its income whether
studentsB fees or
gifts donations subsidies or other
forms of philanthropy to the
accomplishment and promotion of the
purposes enumerated in its ;rticles of
Incorporation! (/ec! 414 (;) (+) 8I>(
of 4JJLR
'onor6s Tax$ 'onation to Po"itica" !an&i&ate (24)
@ is a friend of 7 the chairman of &olitical
&arty K who
wants to run for &resident in the :110
elections! Unowing
that 7 needs funds for posters and
streamers @ is thin#ing of donating to 7
&4,1111!11 for his campaign! ?e as#s you
whether his intended donation to 7 will be
sub2ect to the donorBs tax! What would
your answer be? Will your answer be the
same if he were to donate to &olitical
&arty K instead of to 7 directly? (=-)
SUGGESTED ANSWER)
"he donation to 7 once he becomes a
candidate for an elective post is not sub2ect
to donorBs tax provided that he complies
with the reDuirement of *ling returns of
contributions with the (ommission on
3lections as reDuired under the Omnibus
3lection (ode!
"he answer would be the same if @ had
donated the amount to &olitical &arty K
instead of to 7 directly because the law
places in eDual footing any contribution to
any candidate political party or coalition of
parties for campaign purposes! (,ection
**(!) of the %**' Tax !ode).
'onor6s Tax$ 'onee or Beneficiary$ Stranger (2)
When the donee or beneficiary is a
stranger the tax
payable by the donor shall be +1- of the net
gifts! Ior purposes of this tax who is a
stranger? (:-)
SUGGESTED ANSWER)
; /">;8.3> is a person who
is not a:
;! Arother sister (whether by whole or
half%blood) spouse ancestor and lineal
descendantC or
A! >elative by consanguinity in the
collateral line within the fourth degree of
relationship!" Q/ec! J= (A) 8I>( of 4JJLR
'onor6s Tax$ Sa"e of s#ares of StocB ; Sa"e of 8ea"
Property (1999)
; an individual sold to A his brother%in%law
his lot with
a mar#et value of &4111111 for &H11!111!
;Bs cost in the lot is &411!111! A is *nancially
capable of buying the lot!
; also owns @ (o! which has a fast growing
business! ; sold some of his shares of stoc# in
@ (o! to his #ey executives in @ (o! "hese
executives are not related to ;! "he selling
price is &+111111 which is the boo# value
of the shares sold but with a mar#et value of
&,111111! ;Bs cost in the shares sold is
&4111111! "he purpose of ; in selling the
shares is to enable his #ey executives to
acDuire a propriety interest in the business
and have a personal
sta#e in its business! 3xplain if
the above
transactions are sub2ect to
donorBs tax! (,-)
SUGGESTED
ANSWER)
"he *rst transaction where a lot was sold
by ; to his brother%in%law for a price below
its fair mar#et value will not be sub2ect to
donorBs tax if the lot Dualifies as a capital
asset! The transfer for less than ade7uate
and full consideration which gives rise to
a deemed gift does not apply to a sale of
property sub1ect to capital gains tax.
(/ection 411 8I>()! ?owever if the lot
sold is an ordinary asset the excess of the
fair mar#et value over the consideration
received shall be considered as a gift
sub2ect to the donorBs tax!
"he sale of shares of stoc# below the fair
mar#et value thereof is sub2ect to the
donorBs tax pursuant to the provisions of
/ection 411 of the "ax (ode! "he excess of
the fair mar#et value over the selling
price is a deemed gift!
A+TERNATI1E
ANSWER)
"he sale of shares of stoc# below the fair
mar#et value will not give rise to the
imposition of the donorBs tax! In
determining the gain from the transfer the
selling price of the shares of stoc#s shall
be the fair mar#et value of the shares of
stoc#s transferred! (/ection H >> 8o! :%
=:)! In which case the reason for the
imposition of the donorBs tax on sales for
inadeDuate consideration does not exist!
2state Tax: !ompre#ensi(e Agrarian 8eform /a1 (199*)
Mose Orti$ owns 411 hectares of
agricultural land planted to coconut trees!
?e died on <ay +1 4JJ0! &rior to his
death the government by operation of
law acDuired under the (omprehensive
;grarian >eform 5aw all his agricultural
lands except *ve (,) hectares! Epon the
death of Orti$ his widow as#ed you how
she will consider the
411 hectares of agricultural land in the
preparation of the estate tax return! What
advice will you give her? SUGGESTED ANSWER)
"he 411 hectares of land that Mose Orti$
owned but which prior to his death on <ay
+1 4JJ0 were acDuired by the government
under (;>& are no longer part of his
taxable gross estate with the exception of
the remaining *ve (,) hectares which
under /ec! L=Ga) of the "ax (ode still
forms part of "decedentBs interest"!
2state Tax: 'onation 0ortis !ausa
(21)
; aged J1 years and suffering from
incurable cancer on
;ugust 4 :114 wrote a will and on the
same day made
several inter%vivos gifts to his children! "en
days later he died! In your opinion are the
inter%vivos gifts considered transfers in
contemplation of death for purposes of
determining properties to be included in his
gross estate? 3xplain your answer! (,-)
SUGGESTED ANSWER)
7es! When the donor ma#es his will within
a short time of or simultaneously with the
ma#ing of gifts the gifts are considered as
having been made in contemplation of
death! (Roce) v. Po)ada)# 45 P<!*. $/5)!
Obviously the intention of the donor in
ma#ing the inter%vivos gifts is to avoid the
imposition of the estate tax and since the
donees are li#ewise his forced heirs who
are called upon to inherit it will create a
presumption 1uris tantum that said
donations were made mortis causa hence
the properties donated shall be included as
part of ;Bs gross estate!
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
44 of 73
"he gross estate shall be determined by
including
2state Tax: 'onation 0ortis !ausa (s) Inter Ci(os (199*)
;re donations inter vivos and donations
mortis causa sub2ect to estate taxes?
SUGGESTED ANSWER)
'onations inter vivos are sub2ect to donorBs
gift tax (/ec!
J4 (a)! "ax (ode) while donations mortis
causa are sub2ect to estate tax (/ec! LL
"ax (ode)! ?owever donations inter vivos
actually constituting taxable lifetime li#e
trans% fers in contemplation of death or
revocable transfers (/ec!
L= (b) and (c) "ax (ode) may be taxed for
estate tax purposes the theory being that
the transferorBs control thereon extends up
to the time of his death!
A+TERNATI1E ANSWER)
'onations inter vivos are not sub2ect to
estate taxes because the transfer of the
property ta#e effect during the lifetime of
the donor! "he transfer is therefore sub2ect
to the donorBs tax!
On the other hand donations mortis causa
are sub2ect to estate taxes since the transfer
of the properties ta#es effect after the death
of the decedent! /uch donated properties
real or personal tangible or intangible shall
form part of the gross estate!
2state Tax: 5ross 2state: A""o1a+"e 'e&uction (21)
On the *rst anniversary of the death of 7 his
heirs hosted
a sumptuous dinner for his doctors
nurses and others who attended to 7
during his last illness! "he cost of the
dinner amounted to &hp ,1111!11!
(ompared to his gross estate the &hp
,1111!11 did not exceed *ve percent of
the estate! Is the said cost of the dinner
to commemorate his one year death
anniversary deductible from his gross
estate? 3xplain your answer! (,-) SUGGESTED
ANSWER)
8o! "his expense will not fall under any of
the allowable deductions from gross estate!
Whether viewed in the context of either
funeral expenses or medical expenses the
same will not Dualify as a deduction!
Iuneral expenses may include medical
expenses of the last illness but not expenses
incurred after burial nor expenses incurred
to commemorate the death anniversary! (De
G0G6a+ V. De G0G6a+# 58 SCRA 34-'.
<edical expenses on the other hand are
allowed only if incurred by the decedent
within one year prior to his death! (/ection
=H(;)(H) 8I>()!
2state Tax: 5ross 2state: 'e&uctions (2)
<r! Ielix de la (ru$ a bachelor resident
citi$en suffered from a heart attac# while on
a business trip to the E/;! ?e died
intestate on Mune 4, :111 in 8ew 7or#
(ity leaving behind real properties situated
in 8ew 7or#C his family home in 6alle
6erde &asig (ityC an oFice condominium
in <a#ati (ityC shares of stoc#s in /an
<iguel (orporationC cash in ban#C
and personal belongings! "he decedent is
heavily insured with Insular 5ife! ?e had no
#nown debts at the time of his death! ;s
the sole heir and appointed ;dministrator
how would you determine the gross estate
of the decedent? What deductions may be
claimed by the estate and when and where
shall the return be *led and estate tax paid?
(+-) SUGGESTED ANSWER)
the value at the time of his death a** o2
t<e (o(et!e) 6e+t!o+ed to the
extent of the interest he had at the time
of his death because he is a <ilipino
citiJe n! Q/ec! =, (;) 8I>( of 4JJLR
With respect to the *!2e !+)0a+ce
(oceed) the amount includible in the
gross estate for &hilippine tax purposes
would be to the extent of the amount
receivable by the estate of the deceased
his executor or administrator under
policies ta#en out by decedent upon his
own life irrespective of whether or not the
insured retained the power of revocation
or to the extent of the amount receivable
by any beneficiary designated in the policy
of insurance except when it is expressly
stipulated that the designation of the
bene*ciary is irrevocable! Q/ec! =, (3)
8I>( of 4JJLR
"he DEDUCTIONS that may be claimed
by the estate are:
4) "he actual funeral expenses or in an
amount eDual to *ve percent (,-) of
the gross estate whichever is lower
but in no case to exceed two
hundred thousand pesos (&:11!111!11)!
Q/ec! =H (;) (4) (a)! 8I>( of 4JJLR
:) "he 2udicial expenses in the
testate or intestate proceedings!(/ec!
=H(;)(4)
+) "he value of the decedentBs family
home located in 6alle 6erde &asig (ity
in an amount not exceeding one million
pesos (&4111111!11) and upon
presentation of a certi*cation of the
barangay captain of the locality that
the same have been the decedentBs
family home! Q/ec! =H (;) (0) IbidR
0) "he standard deduction of &4111111!
(/ec! =H(;)(,)
,) <edical expenses incurred within
one year from death in an amount
not exceeding &,11111!(/ec!
=H(;)(H)
"he ESTATE TAX RETURN shall be
*led within six (H) months from the
decedentBs death (/ec! J1 (A) 8I>( of
4JJLR provided that the (ommissioner of
Internal >evenue shall have authority to
grant in meritorious cases a reasonable
extension not exceeding thirty (+1) days
for *ling the return (/ec! J1 (c) IbidR
3xcept in cases where the (ommissioner
of Internal >evenue otherwise permits the
estate tax return shall be *led with an
authori$ed agent ban# or >evenue 'istrict
OFicer (ollection OFicer or duly
authori$ed "reasurer of &asig (ity the (ity
in which the decedent <r! de la (ru$ was
domiciled at the time of his death! Q/ec! J1
(')! 8I>( of 4JJLR
2state Tax: Inc"usion: 8esi&ent A"ien (199*)
(liF >obertson an ;merican citi$en was
a permanent
resident of the &hilippines! ?e died in
<iami Ilorida! ?e left 41111 shares of
<eralco a condominium unit at the
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
4. of 73
"win "owers Auilding at &asig <etro
<anila and a house
and lot in 5os ;ngeles
(alifornia!
What assets shall be included in the 3state
"ax >eturn to
be *led with the
AI>?
SUGGESTED ANSWER)
;ll of <r! >obertsonBs assets consisting of
41111 shares in the <eralco a
condominium unit in &asig and his house
and lot in 5os ;ngeles (alifornia are
taxable! "he properties of a resident alien
decedent li#e <r! >obertson are taxable
wherever situated (/ees! LL L= and J= "ax
(ode)!
2state Tax: Payment (s) Pro+ate Procee&ings (2*)
6(( is the administrator of the estate of his
father 8.(
in the estate proceedings pending
before the << >egional "rial (ourt! 5ast
year he received from the (ommissioner of
Internal >evenue a de*ciency tax
assessment for the estate in the amount
of &4111111! Aut he ignored the notice!
5ast month the AI> eFected a levy on the
real properties of the estate to pay the
delinDuent tax! 6(( *led a motion with the
probate court to stop the enforcement and
collection of the tax on the ground that the
AI> should have secured *rst the
approval of the probate court which had
2urisdiction over the estate before levying
on its real properties! Is 6((Bs contention
correct? (,-)
SUGGGESTED ANSWER)
8o! 6((Bs contention is not correct! "he
approval of the probate court is not
necessary! &ayment of estate taxes is a
condition precedent for the distribution of
the properties of the decedent and the
collection of estate taxes is executive in
nature for which the court is devoid of any
2urisdiction! ?ence the approval of the
court sitting in probate or as a settlement
tribunal is not a mandatory reDuirement in
the collection of estate taxes (Maco) H v.
Co0t o2 A((ea*)# 3&8 SCRA .& 9$%%&R)!
2state Tax: Situs of Taxation: 7on:8esi&ent 'ece&ent
(2)
'iscuss the rule on situs of taxation with
respect to the
imposition of the estate tax on property left
behind by a non%resident decedent! (:-)
SUGGESTED ANSWER)
"he value of the gross estate of a non%
resident decedent who is a Iilipino citi$en
at the time of his death shall be determined
by including the value at the time of his
death of all property real or personal
tangible or intangible wherever situated to
the extent of the interest therein of the
decedent at the time of his death Q/ec! =,
(;) 8I>( of 4JJL)! "hese properties shall
have a situs of taxation in the &hilippines
hence sub2ect to &hilippine estate taxes!
On the other hand in the case of a non%
resident decedent who at the time of his
death was not a citi$en of the &hilippines
only th at part o f th e entire gross e s ta te
w h ich is situat e d in th e 9 h ilippines to th e
e x tent o f th e in terest the r ein of th e dece d ent
at the time of h is de a th shall b e included in
his ta xa b l e est a te . &rovided that with
respect to intangible personal property we
apply the rule of reciprocity! (Ibid)
2state Tax: Canis#ing 'e&uctions (199*)
6anishing deductions in estate%
taxation?
SUGGESTED
ANSWER)
6anishing deductions or property
previously taxed in estate taxation refers
to the diminishing deducibilityO exemption
at the rate of :1- over a period of *ve (,)
years until it is lost after the *fth year of
any property (situated in the &hilippines)
forming part of the gross estate acDuired
by the decedent from a prior decedent
who died within a period of *ve (,) years
from the decedentBs death!
2state Tax$ Payment (s) Pro+ate Procee&ings
(29)
Is the approval of the court sitting as
probate or estate
settlement court reDuired in the
enforcement and collection of estate tax?
3xplain!
SUGGESTED
ANSWER)
8o the approval of the court sitting in
probate or as a settlement tribunal over
the deceased is not a mandatory
reDuirement in the collection of estate
taxes! "here is nothing in the "ax (ode
and in the pertinent remedial laws that
implies the necessity of the probate or
estate settlement courtBs approval of the
stateBs claim for estate taxes before the
same can be enforced and collected!
(Maco) v. Co0t o2 A((ea*)# G.R. No.
$3/55/# >0+e 4# $%%&'
BUSINESS
TAXES
CAT: Basis of CAT
(1996)
?<at !) t<e 7a)!) o2 t<e Va*0e=Added
Ta@ o+ ta@a7*e )a*e) o2 ea* (o(et1I
SUGGESTED
ANSWER)
"he basis of the 6alue%;dded "ax on
taxable sale of real property is ".>O//
/355I8. &>I(3" which is either selling
price stated in the sale document or the
"Konal 6alue" whichever is higher! In
the absence of $onal values the gross
selling price shall refer to the mar#et
value as shown in the latest tax declaration
or the consideration whichever is higher!
CAT: !#aracteristics of CAT
(1996)
?<at ae t<e c<aacte!)t!c) o2 t<e
Va*0e=Added Ta@I
SUGGESTED
ANSWER)
"he value%added tax is an indirect tax and
the amount of tax may be shifted or passed
on to the buyer transferee or lessee of the
goods properties or services!
A+TERNATI1E
ANSWER)
"he value%added tax has the following
characteristics:
4) It is an indirect tax where tax
shifting is always
presumed:
:) It is consumption%
basedC
+) It is imposed on the value%added in
each stage of distributionC
0) It is a credit%invoice method value%
added taxC and
,) It is not a
cascading tax!
CAT: 2xempte& Transactions (1996)
.ive at least three (+) real estate
transactions which are not sub2ect to the
6alue%;dded "ax!
SUGGESTED ANSWER)
>eal estate transactions which are exempt
from the value% added tax are:
(a) /ale of real property not primarily
held for sale or lease in the ordinary
course of trade or businessC
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
46 of 73
(b) /ale of real property utili$ed for
sociali$ed housing
under >;! 8o! L:LJC
(c) /ale of real property utili$ed under
the low%cost
housing under A& Aig! ::1!
Note: "he other real estate transactions
which are exempt from the value%added tax
which may be cited by the bar candidates
are as follows:
(a) "ransfer of real property to a trustee
if the property
is to be held merely in trust for the
trustor!
(b) "ransfer of real property to a
corporation in
exchange for its shares of stoc#
under /ection
+0(c)(:) and (H)(:) of the "ax (ode!
(c) ;dvance payment by the lessee in a
lease contract when the same is
actually a loan to the lessor from the
lessee!
(d) /ecurity deposits for lease
arrangements to insure
the faithful performance of certain
obligations of the lessee to the lessor!
(e) 5ease of residential units boarding
houses dormito% ries rooms and bed
spaces oFered for rent by their owners
at a monthly rental not exceeding
&+J,1!11 per unit!
CAT: /ia+"e for Payment (1996)
?<o ae *!a7*e 2o t<e (a16e+t o2
Va*0e=Added Ta@I
SUGGESTED ANSWER)
"he persons liable for the value%added tax
are:
a! /ellers of goods and properties in the
course of trade
or businessC
b! /ellers of services in the course of
trade or business
including lessors of goods and propertiesC
c! Importers of taxable goods whether in
the course of
business or not
CAT: Transactions >'eeme& Sa"esG (199,)
Ender the 6alue ;dded tax (6;") the tax is
imposed on
sales barter or exchange of goods and
services! "he 6;"
is also imposed on certain transactions
"deemed%sales"! What are these so%called
transactions "deemed salesB? SUGGESTED
ANSWER)
"he following transactions shall be deemed
sale:
a) "ransfer use or consumption not in
the course of business of goods
originally intended for sale or for use
in the course of businessC
b) 'istribution or transfer to:
(4) /hareholders or investors as
share in the
pro*ts of 6;"%registered
personsC or
(:) (reditors in payment of debtC
c) (onsignment of goods if actual sale is
not made within H1 days following the
date such goods were consignedC and
d) >etirement from or cessation of
business with respect to inventories of
taxable goods existing as of such
retirement or cessation!
CAT$ !o(ere& Transactions (199=)
/tate whether the following
transactions are a)
6;" 3xempt b) sub2ect to 6;" at 41-C or
c) sub2ect to
6;" at
1-:
4) /ale of fresh vegetables by ;ling
Ining at the
&amilihang Aayan ng "rece <artire$!
Q4-R
:) /ervices rendered by Ma#eBs
(onstruction (ompany a contractor
to the World ?ealth Organi$ation in
the renovation of its oFices in <anila!
Q4-R
+) /ale of tractors and other agricultural
implements by
Aung#al Incorporated to local farmers!
Q4-R
0) /ale of >"W by (elyBs AoutiDue a
Iilipino dress
designer in her dress shop and other
outlets! Q4-R
,) Iees for lodging paid by students to
Aahay%Aahayan
'ormitory a private entity
operating a student dormitory
(monthly fee &I,11)! Q4-R
SUGGESTED
ANSWER)
4) 6;" exempt! /ale of agricultural
products such as fresh vegetables in
their original state of a #ind generally
used as or producing foods for human
consumption is exempt from 6;"!
(/ection 41J(c) 8I>()!
:) 6;" at 1-! /ince Ma#eBs (onstruction
(ompany has rendered services to the
World ?ealth Organi$ation which is
an entity exempted from taxation
under international agreements to
which the &hilippines is a signatory
the supply of services is sub2ect to
$ero percent (1-) rate! (/ec!
41=QA4(+) 8I>()!
+) 6;" at 41-! "ractors and other
agricultural implements fall under the
definition of goods which include all
tangible ob2ects which are capable of
pecuniary estimation (/ec!
41HQ;4(4) 8I>( the sales of which
are sub2ect to 6;" at 41-!
0) "his is sub2ect to 6;" at 41-! "his
transaction also falls under the
de*nition of goods which include all
tangible ob2ects which are capable of
pecuniary estimation (/ec! 41HQ;4(4)
8I>( the sales of which are sub2ect
to 6;" at 41-!
,) 6;" 3xempt! "he monthly fee paid by
each student falls under the lease of
residential units with a monthly rental
per unit not exceeding &hp =111 which
Is exempt from 6;" regardless of
the amount of aggregate rentals
received by the lessor during the year!
(/ec! 41J(x) 8I>()! "he term unit shall
mean per person in the case of
dormitories boarding houses and bed
spaces (/ec! 0!41+%4 >>8o! L%J,)!
COMMENT: "he problems do not call for a yes
or no answer! ;ccordingly a bar candidate who
answered only 6;" exempt! 6;" at 41- or 6;"
at 1-! as called for in the problem without
further reasons should be given full credit!
CAT$ 2xemption: !onstitutiona"ity (2*)
; law was passed exempting doctors and
lawyers from the operation of the value
added tax! Other professionals complained
and *led a suit Duestioning the law for being
discriminatory and violative of the eDual
protection clause of the (onstitution since
complainants were not given the
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
42 of 73
same exemption! Is the suit meritorious or
not? >eason
brie)y!
(,-)
SUGGESTED ANSWER)
A! 7es the suit is meritorious! "he 6;" is
designed for economic eFiciencyC hence
should be neutral to those who belong to
the same class! &rofessionals are a class of
taxpayers by themselves who in compliance
with the rule of eDuality of taxation must be
treated ali#e for tax purposes! 3xempting
lawyers and doctors from a burden to
which other professionals are sub2ected will
ma#e the law discriminatory and violative of
the eDual protection clause of the
(onstitution! While singling out a class for
taxationpurposeswill not infringeupon
this constitutional limitation
(S<e** v. Va+o# %. P<!*. 85% 9$%4.:)
singling out a taxpayer from a class will no
doubt transgress the constitutional
limitation (O6oc S0"a Co. I+c.# v.
Tea)0e o2 O6oc C!t1# 33 SCRA -/8
9$%-5R)! "reating doctors and lawyers as a
different class of professionals will not
comply with the reDuirements of a
reasonable hence valid classi*cation
because the classification is not based upon
substantial distinction which ma#es real
differences! "he classification does not
comply with the reDuirement that it should
be germane to the purpose of the law either!
(Pe()!=Co*a Bott*!+" Co.# I+c. v. C!t1 o2
B0t0a+# 3. SCRA &5% 9$%-5:)!
ANOT/ER ANSWER)
8o! "he suit is not meritorious! "he eDual
protection clause of the (onstitution merely
reDuires that all persons sub2ected to
legislation shall be treated ali#e under li#e
circumstances and conditions both in the
privileges conferred and in the liabilities
imposed! "he eDuality in taxation rule is not
violated if classi*cations or distinctions are
made as long as the same are based on
reasonable and substantial diFerences!
GPe()!=Co*a Bott*!+" Co.# I+c. v. C!t1
o2 B0t0a+# 3. SCRA &5% 9$%-5R)!
In the instant case the professions of
doctors and lawyers are not principally
aimed at earning money but for the service
of the people! "he exemption granted to
doctors and lawyers from the operation of
the 6;" is 2ustified as it is not
discriminatory against the other
professionals because they have reasonable
and substantial differences in the conduct
of their professions!
CAT$ 7on:CAT taxpayer$ !"aim for 8efun& (26)
5ilyBs Iashion Inc! is a garment
manufacturer located and
registered as a /ubic Aay Ireeport
3nterprise under >epublic ;ct 8o! L::L and
a non%6;" taxpayer! ;s such it is exempt
from payment of all local and national
internal revenue taxes! 'uring its operations
it purchased various supplies and materials
necessary in the conduct of its manufacturing
business! "he suppliers of these goods shifted
to 5ilyBs Iashion Inc! the 41- 6;" on the
purchased items amounting to &
,11111!11! 5ilyBs Iashion Inc! filed with
the AI> a claim for refund for the input tax
shifted to it by the suppliers! If you were the
(ommissioner of Internal >evenue will you
allow the refund? (,-)
A+TERNATI1E ANSWER)
8o I will not allow the refund! Only 6;"%
>egistered taxpayers are entitled to a
refund of their
unappliedOunused Input 6;" ("ax
>eform ;ct
/ection 44:Q;R
Q4JJLR)!
A+TERNATI1E
ANSWER)
8o! "he exemption of 5ilyBs Iashion Inc! is
only for taxes for which it is directly liable!
?ence it can not claim exemption for a tax
shifted to it which is not at all considered
a tax to the buyer but a part of the
purchase price! 5ilyBs fashion is not the
taxpayer in so far as the passed%on tax is
concerned and therefore it can not claim
for a refund of a tax merely shifted to it
(&hil! ;cetylene (o! Inc! v! (I> 5%
4JL1L;ug! 4L 4J=L)!
(NCTA 34N4: This concept pertains
to the 2AT law which is excluded
from the 3ar coverage #uidelines for
&((.
3ar 4xaminations )une %- &((.)
REMEDIES IN
INTERNA+ RE1ENUE
TAXES
BI8: Assessment: <nregistere& Partners#ip
(199,)
<r! /antos died intestate in 4J=J leaving
his spouse and
*ve children as the only heirs! "he estate
consisted of a family home and a four%door
apartment which was being rented to
tenants! Within the year an extra2udicial
settle% ment of the estate was executed
from the heirs each of them receiving
hisOher due share! "he surviving spouse
assumed administration of the property!
3ach year the net income from the rental
property was distributed to all
proportionately on which they paid
respectively the corresponding income tax!
In 4JJ0 the income tax returns of the
heirs were examined and deficiency
income tax assessments were is% sued
against each of them for the years 4J=J to
4JJ+ inclusive as having entered into an
unregistered partnership! Were the
assessments 2ustified?
SUGGESTED
ANSWER)
7es the assessments were 2usti*ed
because for income tax purposes the co%
ownership of inherited property is
automatically converted into an
unregistered partnership from the
moment the said properties are used as
a common fund with intent to produce
pro*ts for the heirs in proportion to their
shares in the inheritance!
Irom the moment of such partition the
heirs are entitled already to their
respective definite shares of the estate and
the income thereof for each of them to
manage and dispose of as exclusively his
own without the intervention of the other
heirs and accordingly he becomes liable
individually for all taxes in connection
therewith! If after such partition he allows
his shares to be held in common with his
co%heir under a single management to be
used with the intent of ma#ing pro*t
thereby in proportion to his share there can
be no doubt that even if no document or
instrument were executed for the purpose
for tax purposes at least an unregistered
partnership is formed (Loe+Go O+a# et a* v.
CIR# .4 SCRA &.)!
A+TERNATI1E ANSWER)
8o the assessments are not 2usti*ed! "he
mere sharing of income does not of itself
establish a partnership absent any clear
intention of the co%owners who are only
awaiting liDuidation of the estate!
BI8: !o""ection of Tax 'eficiency (1999)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
44 of 73
; died survived by his wife and three
children! "he estate
tax was properly paid and the estate
settled and divided and distributed among
the four heirs! 5ater the AI> found out
that the estate failed to report the
income received by the estate during
administration! "he AI> issued a
de*ciency income tax assessment plus
interest surcharges and penalties! /ince
the + children are residing abroad the AI>
sought to collect the full tax de*ciency
only against the widow! Is the AI> correct?
(41-) SUGGESTED ANSWER)
7es the AI> is correct! In a case where
the estate has been distributed to the heirs
the collection remedies available to the AI>
in collecting tax liabilities of an estate may
either (4) sue all the heirs and collect from
each of them the amount of tax
proportionate to the inheritance received or
(:) by virtue of the lien created under
/ection
:4J sue only one heir and sub2ect the
property he
received from the estate to the payment of
the estate tax! "he AI> therefore is correct
in pursuing the second remedy although this
will give rise to the right of the heir who
pays to see# reimbursement from the other
heirs! (CIR v. P!+eda# 3$ SCRA $/4'. In no
case however can the AI> enforce the tax
liability in excess of the share of the widow
in the inheritance!
BI8: !ompromise$ !on&itions (2)
Ender what conditions may the
(ommissioner of Internal
>evenue be
authori$ed to:
A. (ompromise the payment of any
internal revenue
tax? (:-)
SUGGESTED ANSWER)
"he (ommissioner of Internal >evenue
may be authori$ed to compromise the
payment of any internal revenue tax where:
4) ; reasonable doubt as to the validity
of the claim against the taxpayer existsC
or
:) the *nancial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax!
B. ;bate or cancel a tax
liability? (+-)
SUGGESTED ANSWER)
"he (ommissioner of Internal >evenue may
abate or cancel a tax liability when:
4) "he tax or any portion thereof appears
to be un2ustly
or excessively assessedC or
:) "he administration and collection costs
involved do
not 2ustify the collection of the amount
due! Q/ec!
:10 (A) 8I>( of 4JJLR
BI8: !ompromise$ 2xtent of Aut#ority (1996)
3xplain the extent of the authority of the
(ommissioner
of Internal >evenue to compromise and
abate taxes?
SUGGESTED ANSWER)
"he authority of the (ommissioner to
compromise encompasses both civil and
criminal liabilities of the tax% payer! "he civil
compromise is allowed only in cases
4:) where the tax assessment is of doubtful
validity or
4+) when the financial position of the
taxpayer demonstrates a clear inability to
pay the tax!
"he compromise of the tax liability is possible
at any stage of litigation and the amount of
compromise is left to the discretion of the
(ommissioner except with respect to
*nal assessments issued against
large taxpayers
wherein the (ommissioner cannot
compromise for less than *fty percent
(,1-)! ;ny compromise involving large
taxpayers lower than *fty percent (,1-)
shall be sub2ect to the approval of the
/ecretary of Iinance!
;ll criminal violations except those
involving fraud can be compromised by
the (ommissioner but only prior to the
*ling of the information with the (ourt!
"he (ommissioner may also abate or
cancel a tax liability when
4! the tax or any portion thereof appears
to have been un2ustly or excessively
assessedC or
:! the administrative and collection
costs involved do not Mustify collection
of the amount due! (/ec! :10 8I>()
BI8: !ompromise$ -it##o"&ing Agent
(199=)
<ay the (ommissioner of the Internal
>evenue compro%
mise the payment of withholding tax (tax
deducted and withheld at source) where
the *nancial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax? Q,-4
SUGGESTED
ANSWER)
8o! ; taxpayer who is constituted as
withholding agent who has deducted and
withheld at source the tax on the income
payment made by him holds the taxes as
trust funds for the government (/ec! ,=Q'R)
and is obligated to remit them to the AI>!
"he subseDuent inability of the withholding
agent to payOremit the tax withheld is not a
ground for compromise because the
withholding tax is not a tax upon the
withholding agent but it is only a
procedure for the collection of a tax!
BI8: !orporation: 'istraint ; /e(y
(22)
On <arch 4, :111 the AI> issued a
deficiency income
tax assessment for the taxable year 4JJL
against the 6alera .roup of (ompanies
(6alera) in the amount of &41 million!
(ounsel for 6alera protested the
assessment and reDuested a
reinvestigation of the case! 'uring the
investigation it was shown that 6alera had
been transferring its properties to other
persons! ;s no additional evidence to
dispute the assessment had been
presented the AI> issued on Mune 4H :111
warrants of distraint and levy on the
properties and ordered the *ling of an
action in the >egional "rial (ourt for the
collection of the tax! (ounsel for 6alera
*led an in2unctive suit in the >egional "rial
(ourt to compel the AI> to hold the
collection of the tax in abeyance until the
decision on the protest was rendered!
;! (an the AI> *le the civil action for
collection pending decision on the
administrative protest? 3xplain! (+-)
SUGGESTED ANSWER)
;! 7es because there is no
prohibition for this procedure considering
that the *ling of a civil action for collection
during the pendency of an administrative
protest constitutes the *nal decision of the
(ommissioner on the protest (CIR v. U+!o+
S<!((!+" Co(.# 54 SCRA
4.5
9$%%/:)!
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
49 of 73
A! ;s counsel for 6alera what action
would you ta#e
in order to protect the interest of
your client? 3xplain your answer! (:-)
SUGGESTED ANSWER)
A! I will wait for the *ling of the civil
action for collection and consider the
same as an appealable decision! I will
not *le an in2unctive suit because it is not
an available remedy! I would then appeal the
case to the (ourt of "ax ;ppeals and move
for the dismissal of the collection case with
the >"(! Once the appeal to the ("; is *led
on time the ("; has exclusive 2urisdiction
over the case! ?ence the collection case in
the >"( should be dismissed (Ta7e) v.
F*oMo# $$4 SCRA 3&5 9$%53:)!
BI8: !ourt of Tax Appea"s: !o""ection of Taxes$ 5roun&s
for !ompromise (1996)
4! <ay the (ourt of "ax ;ppeals issue an
in2unction to
en2oin the collection of taxes by the
Aureau of
Internal >evenue? 3xplain!
SUGGESTED ANSWER)
7es! When a decision of the
(ommissioner on a tax protest is appealed
to the ("; pursuant to ,ec. %% of $A. No.
%%&- (law creating the !TA) in relation to
,ec. &&* of the N6$! such appeal does not
suspend the payment levy distraint andOor
sale of any of the taxpayerBs property for the
satisfaction of his tax liability! ?owever
when in the opinion of the ("; the
collection of the tax may 2eopardi$e the
interest of the .overnment andOor the
taxpayer the (ourt at any stage of the
proceedings may suspend or restrain the
collection of the tax and reDuire the
taxpayer either to deposit the amount
claimed or to *le a surety bond for not more
than double the amount with the (ourt!
:! <ay the tax liability of a taxpayer be
compromised during the pendency of an
appeal? 3xplain!
SUGGESTED ANSWER)
7es! 'uring the pendency of the appeal the
taxpayer may still enter into a compromise
settlement of his tax liability for as long as
any of the grounds for a compromise i!e!C
doubtf u l validi ty o f a s se s sment and
Enancial incapacity of taxpaye r is present!
; compromise of a tax liability is possible
at any stage of litigation even during
appeal although legal propriety demands
that prior leave of court should be obtained
(Pa)0deco v). CIR L=8%85&# >0+e 3%#
$%53)!
BI8: !rimina" Prosecution: Tax 2(asion (199=)
Is assessment necessary before a taxpayer
may be prosecuted for willfully attempting
in any manner to evade or defeat any tax
imposed by the Internal >evenue (ode? Q,-)
SUGGESTED ANSWER)
8o! ;ssessment is not necessary before a
taxpayer maybe prosecuted if there is a prima
facie showing of a willful attempt to evade
taxes as in the taxpayerBs failure to
declare a specific item of taxable income in
his income tax returns (U+"a7 v. C0)! %&
SCRA 5&&)! On the contrary if the taxes
alleged to have been evaded is computed
based on reports approved by the AI> there
is a presumption of regularity of the
previous payment of taxes so that unless
and until the AI> has made a *nal
determination of what is supposed to be the
correct taxes the taxpayer should not be
placed in the crucible of
criminal prosecution (CIR v.
Fot0+e To7acco
Co(.# GR No. $$%833#
>0+e .# $%%-)!
BI8: 2xtinction$ !rimina" /ia+i"ity of t#e Taxpayer (22)
<r! (han a manufacturer of garments
was investigated for failure to *le tax
returns and to pay taxes for the taxable
year 4JJL! 'espite the subpoena duces
tecum issued to him he refused to
present and submit his boo#s of
accounts and allied records!
Investigators therefore raided his
factory and sei$ed several bundles
of manufactured garments supplies and
unpaid imported textile materials! ;fter
his apprehension and based on the
testimony of a former employee
de*ciency income and business taxes
were assessed against <r! (han on ;pril
4, :111! It was then that he paid the
taxes! (riminal
action was nonetheless instituted against
him in the >egional "rial (ourt for
violation of the "ax (ode! <r! (han moved
to dismiss the criminal case on the ground
that he had already paid the taxes assessed
against him! ?e also demanded the return
of the garments and materials sei$ed from
his factory! ?ow will you resolve <r! (hanBs
motion? (,-)
SUGGESTED
ANSWER)
"he motion to dismiss should be denied!
"he satisfaction of the civil liability is not
one of the grounds for the extinction of
criminal action (Peo(*e v. I*de2o+)o
T!ea# $3 SCRA --- 9$%-.:)!
5i#ewise the payment of the tax due after
apprehension shall not constitute a valid
defense in any prosecution for violation of
any provision of the "ax (ode (/ec! :,+QaR
8I>()! ?owever the garments and
materials sei$ed from the factory should be
ordered returned because the payment of
the tax had released them from any lien
that the .overnment has over them!
!ustoms$ Huris&iction$ Assessment$ <npai&
!ustoms
'utiesETaxes
(26)
"he (ollector of (ustoms issued an
assessment for un%
paid customs duties and taxes on the
importation of your client in the amount of
&J=1111!11! Where will you *le your case
to protect your clientBs right? (hoose the
correct courtsO agencies observing their
proper hierarchy! (,-)
4! (ourt of "ax
;ppeals
:! (ollector of
(ustoms
+! (ommissioner of
(ustoms
0! >egional "rial
(ourt
,! <etropolitan "rial
(ourt
H! (ourt of
;ppeals
L! /upreme
(ourt
SUGGESTED ANSWER)
4! &rotest with the (ollector of (ustoms
(,ec. &5(/ T!!)
:! ;ppeal to the (ommissioner of
(ustoms (,ec. &5%5 T!!).
+! ;ppeal to the ("; ($A
*&/&)
0! &etition for >eview on (ertiorari
/upreme (ourt ($ule
"- of the %**' $ules of !ivil
9rocedure ($A *&/&).
Taxpayer$ Prescripti(e Perio&$ Assessment$ 'eficiency
Income Tax (26)
"he (ommissioner of Internal >evenue
issued an assess%
ment for de*ciency income tax for taxable
year :111 last
Muly +4 :11H in the amount of & 41 <illion
inclusive of
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
.0 of 73
surcharge and interests! If the delinDuent
taxpayer is your
client what steps will you ta#e? What is
your defense? (41-)
A+TERNATI1E ANSWER)
;s (ounsel I shall move to cancel the
;ssessment because of prescription! "he
three (+) year period of assessment for the
Income "ax >eturns of :111 starts on ;pril
4, :114 and ends on ;pril 4H :110!
"he assessment of Muly +4 :11H is beyond
the three (+) year prescriptive period and
can no longer have any legal binding eFect
(Tax $eform Act Title 2666 !hapter 6
,ection
&(5
A%**'@).
A+TERNATI1E ANSWER)
/ince my client has lost his right to protest
I will advise him to wait for a collection
action by the (ommissioner! "hen I will *le
a petition for review with the ("; to
Duestion the collection! /ince the
assessment was issued beyond the
prescriptive period to assess the action to
collect an invalid assessment is not
warranted (P<!*. >o0= +a*!)t)# I+c. v. CIR#
G.R. No. $-3543# Dece67e $-# 3//.'.
Taxpayer$ Assessment$ 'eficiency Tax (26)
On Mune 4 :11+ .lobal Aan# received a
final notice of
assessment from the AI> for de*ciency
documentary stamp tax in the amount of &,
<illion! On Mune +1 :11+ .lobal Aan# filed
a reDuest for reconsideration with the
(ommissioner of Internal >evenue! "he
(ommissioner denied the reDuest for
reconsideration only on <ay +1
:11H at the same time serving on .lobal
Aan# a warrant
of distraint to collect the de*ciency tax! If
you were its counsel what will be your
advice to the ban#? 3xplain! (,-)
A+TERNATI1E ANSWER)
"he denial for the reDuest for
reconsideration is the *nal decision of the
(I>!! I would advise .lobal Aan# to
appeal the denial to the (ourt of "ax
;ppeals ((";) within +1 days from receipt!
I will further advise the ban# to *le a motion
for in2unction with the (ourt of "ax ;ppeals
to en2oin the (ommissioner from enforcing
the assessment pending resolution of the
appeal! While an appeal to the ("; will not
suspend the payment levy distraint andOor
sale of any property of the taxpayer for the
satisfaction of its tax liability the ("; is
authori$ed to give in2unctive relief if the
enforcement would 2eopardi$e the interest
of the taxpayer as in this case where the
assessment has not become *nal (La)co+a
La+d Co. v# CIR# CTA Ca)e No. 4&&&#
>a+0a1 .# 3///A See a*)o Rev!)ed CTA
R0*e)# a((oved 71 t<e S0(e6e Co0t o+
Dece67e
$4#
3//4'.
A+TERNATI1E ANSWER)
I will advice the Aan# to promptly pay
the deficiency documentary stamp tax and
the interest charges to avoid any further
increase in the tax liability! "he Aan# should
have appealed to the (ourt of "ax ;ppeals
when the AI> failed to decide on its >eDuest
for >econsideration within thirty (+1) days
after the inaction of the AI> for one hundred
eighty (4=1) days or on 'ecember +4 :11+!
"he "ax ;ssessment has already become
*nal executory and unappealable at that
point (BPI v. CIR# G.R. No. $8%&8-# Octo7e
$&# 3//4'.
Taxpayer$ CAT:registere&$ !"aim for Tax 8efun& (26)
>oyal <ining is a 6;"%
registered domestic
mining entity! One of its products is silver
being sold to the Aang#o /entral ng
&ilipinas! It *led a claim with the AI> for
tax refund on the ground that under
/ection 41H of the "ax (ode sales of
precious metals to the Aang#o /entral ng
&ilipinas are considered export sales
sub2ect to $ero%rated 6;"! Is >oyal
<iningBs claim meritorious? 3xplain! (,-)
SUGGESTED
ANSWER)
8o >oyal <iningBs claim is not meritorious
because it is the sale to the Aang#o /entral
ng &ilipinas of gold and not silver which is
considered export sales at Kero%rated 6;"
(Tax $eform Act Title 62 ,ection %(.A&@Aa@
A"@).
(NOTA BENE: 42AT is excluded from the 3ar
coverage #uidelines
for &((. 3ar 4xaminations
)une %- &((.)
BI8: Frau&u"ent 8eturn$ Prima Facie 2(i&ence
(199=)
What constitutes prima facie evidence
of a false or
fraudulent
return? Q:-R
SUGGESTED
ANSWER)
"here is prima facie evidence of a false
or fraudulent return when the taxpayer
has willfully and #nowingly *led it with
the intent to evade a part or all of the tax
legally due from him (U+"a7 v. C0)!##
%& SCRA 5&&)! "here must appear a
design to mislead or deceive on the part of
the taxpayer or at least culpable
negligence! ; mista#e not culpable in
respect of its value would not constitute a
false return! (+ords and 9hrases 2ol. %.
page %'5).
BI8: Frau&u"ent 8eturn$ Prima Facie 2(i&ence
(22)
What constitutes prima facie evidence
of a false or
fraudulent return to 2ustify the imposition
of a ,1- surcharge on the de*ciency tax
due from a taxpayer? 3xplain! (,-)
SUGGESTED
ANSWER)
"here is a prima facie evidence of false
or fraudulent return when the taxpayer
,F3,TANT6A??H FNB4$- B4!?A$4B his
taxable sales receipts or income or
,F3,TANT6A??H C24$,TAT4B his
deductions the taxpayerBs failure to report
sales receipts or income in an amount
exceeding +1- of that declared per return
and a claim of deduction in an amount
exceeding +1- of actual deduction shall
render the taxpayer liable for substantial
underdeclaration and overdeclaration
respectively and will 2ustify the imposition
of the ,1- surcharge on the deficiency tax
due from the taxpayer! (,ec. &"/ N6$!).
BI8: 5arnis#ment: BanB Account of a Taxpayer (199=)
Is the AI> authori$ed to issue a warrant of
garnishment against the ban# account of
a taxpayer despite the pendency of his
protest against the assessment with the
AI> or appeal with the (ourt of "ax
;ppeals? Q,-R SUGGESTED ANSWER)
"he AI> is authori$ed to issue a warrant of
garnishment against the ban# account of a
taxpayer despite the pendency of protest
(Da7e) v. F*oMo# $4 SCRA 3&5)!
8owhere in the "ax (ode is the
(ommissioner reDuired to rule *rst on
the protest before he can institute
collection proceedings on the tax assessed!
"he legislative policy is to give the
(ommissioner much latitude in the speedy
and prompt collection of taxes because it is
in taxation that the .overnment depends
to obtain the
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
.1 of 73
means to carry on its operations (Re(07*!c
0. T!6 T!a+
Te+" So+)# I+c.# $-
SCRA 45.)!
A+TERNATI1E ANSWER)
8o because the assessment has not yet
become *nal executory and demandable!
"he basic consideration in the collection of
taxes is whether the assessment is *nal and
unappealable or the decision of the
(ommissioner is *nal executory and
demandable the AI> has legal basis to
collect the tax liability by either
administrative or 2udicial action!
BI8: Pre:Assessment 7otice not 7ecessary (22)
In the investigation of the withholding tax
returns of ;K
<edina /ecurity ;gency (;K <edina) for
the taxable years 4JJL and 4JJ= a
discrepancy between the taxes withheld
from its employees and the amounts actually
remitted to the government was found!
;ccordingly before the period of
prescription commenced to run the AI>
issued an assessment and a demand letter
calling for the immediate payment of the
de*ciency withholding taxes in the total
amount of &:,1111!11! (ounsel for ;K
<edina protested the assessment for being
null and void on the ground that no pre%
assessment notice had been issued!
?owever the protest was denied! (ounsel
then *led a petition for prohibition with
the (ourt of "ax ;ppeals to restrain the
collection of the tax!
;! Is the contention of the counsel
tenable? 3xplain
(:-)
SUGGESTED ANSWER)
;! 8o the contention of the counsel is
untenable! /ection ::= of the "ax (ode
expressly provides that no pre%assessment
notice is reDuired when a discrepancy has
been determined between the tax
withheld and the amount actually remitted
by the withholding agent! /ince the amount
assessed relates to deficiency withholding
taxes the AI> is correct in issuing the
assessment and demand letter calling for
the immediate payment of the deficiency
withholding taxes! (/ec! ::= 8I>()!
A! Will the special civil action for
prohibition brought before the (";
under /ec! 44 of >!; 8o! 44:,
prosper? 'iscuss your answer! (+-)
SUGGESTED ANSWER)
A! "he special civil action for
prohibition will not prosper because the
("; has no 2urisdiction to entertain the
same! "he power to issue writ of in2unction
provided for under /ection 44 of >; 44:, is
only ancillary to its appellate 2urisdiction! "he
("; is not vested with original 2urisdiction to
issue writs of prohibition or in2unction
independently of and apart from an appealed
case! "he remedy is to appeal the decision of
the AI>! (Co**ecto v. D0)eco# 8 SCRA 8$8
9$%-$:)!
BI8: Prescripti(e Perio&: !i(i" Action (22)
On ;ugust , 4JJL ;damson (o! Inc!
(;damson) *led a
reDuest for reconsideration of the de*ciency
withholding
tax assessment on Muly 41 4JJL covering
the taxable year
4JJ0! ;fter administrative hearings
the original
assessment of &4,1111!11 was reduced to
&L,!111!11 and a modi*ed assessment was
thereafter issued on ;ugust 1,
4JJJ! 'espite repeated demands
;damson failed and
refused to pay the
modi*ed assessment!
(onseDuently the AI> brought an action
for collection in the >egional "rial
(ourt on /eptember 4, :111!
;damson moved to dismiss the action on
the ground that the governmentBs right to
collect the tax by 2udicial action has
prescribed! 'ecide the case! (,-)
SUGGESTED
ANSWER)
"he right of the .overnment to collect by
2udicial action has not prescribed! "he
*ling of the reDuest for reconsideration
suspended the running of the prescriptive
period and commenced to run again when
a decision on the protest was made on
;ugust , 4JJJ! It must be noted that in all
cases covered by an assessment the
period to collect shall be *ve (,) years from
the date of the assessment but this period
is suspended by the *ling of a reDuest for
reconsideration which was acted upon by
the (ommissioner of Internal >evenue
(CIR v. ?1et< S0aco La7oato!e)# I+c.#
3/3 SCRA $34 9$%%$:)!
BI8: Prescripti(e Perio&$ Assessment ; !o""ection
(1999) ; (o! a &hilippine (orporation
*led its 4JJ, Income "ax >eturn (I">) on
;pril 4, 4JJH showing a net loss! On
8ovember 41 4JJH it amended its 4JJ,
I"> to show more losses! ;fter a tax
investigation the AI> disallowed certain
deductions claimed by ; (o! putting ;
(o! in a net income position! ;s a result
on ;ugust , 4JJJ the AI> issued a
de*ciency income assessment against ;
(o! ; (o! protested the assessment on the
ground that it has prescribed: 'ecide!
(,-)
SUGGESTED
ANSWER)
"he right of the AI> to assess the tax has
not prescribed! T h e rule is th at internal
revenue t a x e s sh al l be a s ses s e d wi th in
three yea r s a f te r the la s t day p re s c r ibed by
law for th e Eling of the re tu r n. (,ection
&(5 N6$!) ?owever if the return
originally *led is amended substantially
the counting of the three%year period starts
from the date the amended return was
*led! (CIR v. P<oe+!@ A))0a+ce Co.# Ltd.#
$. SCRA 43)! "here is a substantial
amendment in this case because a new
return was *led declaring more losses
which can only be done either (4) in
reducing gross income or (:) in increasing
the items of deductions claimed!
BI8: Prescripti(e Perio&$ !rimina" Action
(22)
"7 (orporation *led its *nal ad2usted
income tax return
for 4JJ+ on ;pril 4: 4JJ0 showing a net
loss from operations! ;fter investigation the
AI> issued a pre% assessment notice on
<arch +1 4JJH! ; *nal notice and demand
letter dated ;pril 4, 4JJL was issued
personally delivered to and received by the
companyBs chief accountant! Ior willful
refusal and failure of "7 (orporation to pay
the tax warrants of distraint and levy on its
properties were issued and served upon it!
On Manuary 41 :11: a criminal charge
for violation of the "ax (ode was instituted
in the >egional "rial (ourt with the
approval of the (ommissioner!
"he company moved to dismiss the criminal
complaint on the ground that an act for
violation of any provision of the "ax (ode
prescribes after *ve (,) years and in this
case the period commenced to run on
<arch +1 4JJH when the pre%assessment
was issued! ?ow will you resolve the
motion? 3xplain your answer! (,-)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
.2 of 73
&:!1 <illion as the selling price! 'iscuss the
tax
SUGGESTED ANSWER)
"he motion to dismiss should not be
granted! It is only when the assessment has
become *nal and unappealable that the ,%
year period to *le a criminal action
commences to run (T0(aG v. U*o(# 8$-
SCRA $$5 9$%%%:)! "he pre% assessment
notice issued on <arch +1 4JJH is not a
*nal assessment which is enforceable by the
AI>! It is the issuance of the *nal notice and
demand letter dated ;pril
4, 4JJL and the failure of the taxpayer to
protest within
+1 days from receipt thereof that made
the assessment
*nal and unappealable! "he earliest date
that the assessment has become *nal is <ay
4H 4JJL and since the criminal charge was
instituted on Manuary 41 :11: the same
was timely filed!
BI8: Secrecy of BanB 'eposits /a1 (199=)
(an the (ommissioner of Internal >evenue
inDuire into the ban# deposits of a
taxpayer? If so does this power of the
(ommissioner con)ict with >!;! 401,
(/ecrecy of Aan# 'eposits 5aw) Q,-R
SUGGESTED ANSWER)
"he (ommissioner of Internal >evenue is
authori$ed to inDuire into the ban# deposits
of:
4) a decedent to determine his
gross estateC
:) any taxpayer who has *led an
application for compromise of his tax
liability by means of financial incapacity
to pay his tax liability (/ec! H(I)! 8I>()!
5) Where the taxpayer has signed a
waiver authori$ing the
(ommissioner or his duly
authori$ed representatives to
InDuire into the ban# deposits! (Note:
This answer was not part of the
answers enumerated in the F9 ?aw
Answers to the 3ar in this but was later
added in the recent F9 ?aw Answers
to the 3ar as a result of A8?A ?aw of
&((%)
"he limited power of the (ommissioner does
not con)ict with >!;! 8o! 401, because the
provisions of the "ax (ode granting this
power is an exception to the /ecrecy of
Aan# 'eposits 5aw as embodied in a later
legislation!
Iurthermore in case a taxpayer applies for
an application to compromise the payment
of his tax liabilities on his claim that his
*nancial position demonstrates a clear
inability to pay the tax assessed his
application shall not be considered unless
and until he waives in writing his privilege
under >!;! 8o! 401, and such waiver shall
constitute the authority of the (ommissioner
to inDuire into the ban# deposits of the
taxpayer!
BI8$ !onse3uence$ Taxpayer gui"ty of Tax 2(asion (29)
Mosel agreed to sell his condominium unit to
Mess for &:!,
<illion! ;t the time of the sale the property
had a $onal value of &:!1 <illion! Epon the
advice of a tax consultant the parties agreed
to execute two deeds of sale one indicating
the $onal value of &:!1 <illion as the selling
price and the other showing the true selling
price of &:!,
<illion! "he tax consultant *led the
capital gains tax
return using the deed of sale showing the
$onal value of
implications and conseDuences of
the action! (,-)
A+TERNATI1E
ANSWER)
"he action of the parties constitutes tax
evasion and exposes Mosel to:
(4) '3II(I38(7 II8;5 I8(O<3 ";@ on
the sale of real property in the
&hilippines classi*ed as a capital
asset! Ender /ec! :0(') of the 8I>(
the *nal tax of six percent (H-) shall be
based on the gross selling price of
&:!, <illion or $onal value of &:!1
<illion whichever is higher i!e!
&:!, <illionC
(:) I>;E' &38;5"7 amounting to ,1-
surcharge on the amount evaded (/ec!
:0=QAR 8I>()C and
(+) '3II(I38(7 I8"3>3/" of :1- per
annum on the de*ciency! (/ec! :0JQ;R
QAR 8I>()
A+TERNATI1E
ANSWER)
"here is tax evasion because of the
concurrence of the following factors:
4) "he payment of less than that #nown by
the taxpayer to
be legally due or the non%payment of tax
when it is shown that a tax is due! It is
evident that the parties that the tax due
should be computed based on the valuation
of &:!, million and not &:!1 millionC
:) ;n accompanying state of mind
which is described as being "evil" on "bad
faith" "willful" or "deliberate and not
accidental!" 'espite the above #nowledge
the parties deliberately misrepresented the
true basis of the saleC and
+) ; course of action or failure of
action which is unlawful! "his is shown by
the preparation of the two deeds
of sale which showed diFerent
values! (Co66!))!o+e o2 I+te+a*
Reve+0e v. T<e E)tate o2Be+!"+o P#
T7da# >.# G.R. No. $.&$55# Se(te67e
$.#
3/
/.
'
"he tax evasion committed should
result to the imposition of a ,1-
fraud surcharge on the amount evaded
(,ec. &"/A3@ N6$!) payment of the
'e*ciency "ax and interest of :1- per
annum on the de*ciency! (,ec. &"*AA@A3@
N6$!) "he parties may li#ewise be
sub2ect to criminal prosecution for willfully
failing to pay the tax as well as for *ling a
false and fraudulent return! (,ees. &-"
&-- and &-' N6$!)
BI8: Summary 8eme&y: 2state Tax 'eficiencies
(199=)
Is the AI> authori$ed to collect estate tax
de*ciencies by the summary remedy of
levy upon and sale of real properties of the
decedent without *rst securing the
authority of the court sitting in probate over
the supposed will of the decedent?
SUGGESTED ANSWER)
7es! "he AI> is authori$ed to collect estate
tax deficiency through the summary remedy
of levying upon and sale of real properties of
a decedent without the cognition and
authority of the court sitting in probate over
the supposed will of the deceased because
the collection of estate tax is executive in
character! ;s such the estate tax is
exempted from the application of the statute
of non%claims and this is 2usti*ed by the
necessity of government funding
immortali$ed in the maxim that taxes are
the lifeblood of the government (Maco) v.
CIR# G.R. No. $3/55/# >0+e
4#
$%%&)
!
A+TERNATI1E ANSWER)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
.* of 73
7es if the tax assessment has already
become *nal
executory and enforceable! "he approval of
the court sitting in probate over the
supposed will of the deceased is not a
mandatory reDuirement for the collection of
the estate tax! "he probate court is
determining issues which are not against
the property of the decedent or a claim
against the estate as such but is against the
interest or property right which the heir
legatee devisee etc! has in the property
formerly held by the decedent! (Maco) v.
CIR# G.R# No. $3/55/# >0+e 4# $%%L)!
BI8: <npai& Taxes (s) !"aims for <npai& -ages (1999)
Ior failure of Oceanic (ompany Inc!
(O(3;8I() to
pay de*ciency taxes of &:1 <illion the
(ommissioner of Internal >evenue issued
warrants of distraint on O(3;8I(Bs
personal properties and levied on its real
properties! <eanwhile the 'epartment of
5abor through the 5abor
;rbiter rendered a
decision ordering O(3;8I( to pay
unpaid wages and other bene*ts to its
employees! Iour barges belonging to
O(3;8I( were levied upon by the sheriF
and later sold at public auction!
"he (ommissioner of Internal >evenue
*led a motion with the 5abor ;rbiter to
annul the sale and en2oin the sheriF from
disposing the proceeds thereof! "he
employees of O(3;8I( opposed the motion
contending that ;rt! 441 of the 5abor (ode
gives *rst preference to claims for unpaid
wages!
>esolve the motion!
3xplain!
SUGGESTED ANSWER)
"he motion *led by the (ommissioner
should be granted because the claim of the
government for unpaid taxes are generally
preferred over the claims of laborers for
unpaid wages! "he provision of ;rticle 441
of the 5abor (ode which gives laborersB
claims for preference applies only in case of
ban#ruptcy or liDuidation of the employerBs
business! In the instant case Oceanic is not
under ban#ruptcy or liDuidation at the time
the warrants of distraint and levy were
issued hence the opposition of the
employees is unwarranted! (CIR v). NLRC
et a* G.R. No.
&.%-4# Nove67e
%# $%%.'.
BI8$ Assessment$ !rimina" !omp"aint (29)
In 4JJ, the AI> *led before the
'epartment of Mustice ('OM) a criminal
complaint against a corporation and its
oFicers for alleged evasion of taxes! "he
complaint was supported by a sworn
statement of the AI> examiners showing the
computation of the tax liabilities of the erring
taxpayer! "he corporation filed a motion to
dismiss the criminal complaint on the ground
that there has been as yet no assessment of
its tax liabilityC hence the criminal complaint
was premature! "he 'OM denied the motion
on the ground that an assessment of the tax
deficiency of the corporation is not a
precondition to the *ling of a criminal
complaint and that in any event the 2oint
aFidavit of the AI> examiners may be
considered as an assessment of the tax
liability of the corporation! Is the ruling of the
'OM correct? 3xplain! (,-)
SUGGESTED ANSWER)
"he 'OM is correct in ruling that an
assessment of the tax deficiency of the
corporation is not a precondition to the *ling
of a criminal complaint! "here is no need
for an
assessment so long as there is a
prima facie
showing of violation of the provisions of
the "ax (ode! ;fter all a criminal charge is
instituted not to demand payment but to
penali$e the tax payer for violation of the
"ax (ode! (Co66!))!o+e o2 I+te+a*
Reve+0e v. Pa)co Rea*t1 a+d
Deve*o(6e+t Co(oat!o+# G.R. No.
$358$4# >0+e 3%# $%%%) Iurthermore
there is nothing in the problem that
shows that the AI> in *ling the case is
also interested in collecting the tax
deficiency!
?owever it is in error when it ruled that
the 2oint aFidavit of the AI> examiners may
be considered as an assessment of the tax
liability of the corporation! "he 2oint
aFidavit showing the computation of the
tax liabilities of the erring taxpayer is not a
tax assessment because it was not sent to
the taxpayer and does not demand
payment of the tax within a certain period
of time! ;n assessment is deemed made
only when the AI> releases mails or sends
such notice to the taxpayer!
(Co66!))!o+e o2 I+te+a* Reve+0e v.
Pa)co Rea*t1 a+d Deve*o(6e+t
Co(oat!o+# G.R. No.
$358$4# >0+e
3%# $%%%'
Note) a+d Co66e+t): A plea is made
for liberality in
correcting the examinees answers
because the examination is very
lo
n
g.
BI8$ Aut#ority$ 8efun& or !re&it of Taxes
(29)
/tate the conditions reDuired by the "ax
(ode before the (ommissioner of Internal
>evenue could authori$e the refund or
credit of taxes erroneously or illegally
received! SUGGESTED ANSWER)
Ender /ec! :10(() 8I>( the following
conditions must be met:
4! "here must be a written claim for
refund *led by the taxpayer with the
(ommissioner!
:! "he claim for refund must be a
categorical demand for reimbursement!
+! "he claim for refund must be *led
within two (:) years from date of
payment of the tax or penalty
regardless of any supervening cause!
BI8$ !ompromise
(2*)
;fter the tax assessment had
become *nal and
unappealable the (ommissioner of
Internal >evenue
initiated the *ling of a civil action to collect
the tax due from 8@! ;fter several years a
decision was rendered by the court
ordering 8@ to pay the tax due plus
penalties and surcharges! "he 2udgment
became *nal and executory but attempts
to execute the 2udgment award were futile!
/ubseDuently 8@ oFered
the (ommissioner a
compromise settlement of ,1- of the
2udgment award representing that this
amount is all he could really aFord! 'oes the
(ommissioner have the power to accept the
compromise oFer? Is it legal and ethical?
3xplain brie)y! (,-)
SUGGESTED ANSWER)
7es! "he (ommissioner has the power to
accept the oFer of compromise if the
*nancial position of the taxpayer clearly
demonstrates a clear inability to pay the
tax (/ection :10 8I>()!
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
.4 of 73
;s represented by 8@ in his oFer only ,1- of the
2udgment award is all he could really
aFord! "his is an oFer for compromise
based on *nancial incapacity which the
(ommissioner shall not accept unless
accompanied by a waiver of the secrecy of
ban# deposits (/ection HQIV 8I>()! "he
waiver will enable the (ommissioner to
ascertain the financial position of the
taxpayer although the inDuiry need not be
limited only to the ban# deposits of the
taxpayer but also as to his *nancial position
as reflected in his *nancial statements or
other records upon which his property
holdings can be ascertained!
If indeed the *nancial position of 8@ as
determined by the (ommissioner
demonstrates a clear inability to pay the tax
the acceptance of the offer is legal and
ethical because the ground upon which the
compromise was anchored is within the
context of the law and the rate of
compromise is well within and far exceeds
the minimum prescribed by law which is
only 41- of the basic tax assessed!
BI8$ !ompromise (29)
/tate and discuss brie)y whether the
following cases may be compromised or may
not be compromised:
a) 'elinDuent
accountsC
b) (ases under administrative protest
after issuance of
the *nal assessment notice to the
taxpayer which are still pendingC
c) (riminal tax fraud
casesC
d) (riminal violations already
*led in courtC
e) (ases where *nal reports of
reinvestigation or reconsideration have
been issued resulting in the reduction of
the original assessment agreed to by the
taxpayer when he signed the
reDuired agreement form! (,-)
SUGGESTED ANSWERS)
"he following cases may still be
compromised ($.$. 5(-(& A&((&@) because
of the taxpayerBs *nancial incapacity to
pay the tax due or the assessmentBs doubtful
validity:
a) '35I8NE38" ;((OE8"/
may be
compromised because there is no showing
that there is a duly%approved schedule of
installment paymentsC and
b) (ases under administrative protest
after issuance of the *nal assessment notice
to the taxpayer which are still pending!
"he followingcases 8 AH NC ?CN#4$
34 !C89$O<I/3' ($.$. 5(-(& A&((&@)
because the taxpayer has not paid his taxes
for reasons other than his *nancial incapacity
or the doubtful validity of the assessment:
a) (>I<I8;5 ";@ I>;E' cases as
may be
determined by the (ommissioner or his
authori$ed agents may not be compromisedC
b) (>I<I8;5 6IO5;"IO8/ ;5>3;'7
II53' I8 (OE>" so that the taxpayer will
not pro*t from his fraud which would
encourage tax evasionC and
c) (ases where *nal reports of
reinvestigation or
reconsideration have been issued
resulting in the reduction of the original
assessment agreed to by the taxpayer when
he signed the reDuired agreement form!
"he taxpayer is estopped from
applying for a compromise!
BI8$ 'eficiency Tax Assessment (s) Tax 8efun& E
Tax
!re&it
(29)
Is a de*ciency tax assessment a bar to a
claim for tax
refund or tax credit?
3xplain!
SUGGESTED
ANSWER)
7es the de*ciency tax assessment is a bar
to a tax refund or credit! "he "axpayer
cannot be entitled to a refund and at the
same time liable for a tax deficiency
assessment for the same year! "he
de*ciency assessment creates a doubt as
to the truth and accuracy of the "ax
>eturn! /aid >eturn cannot therefore be
the basis of the refund (Co66!))!o+e o2
I+te+a* Reve+0e v. A**te* 93//3:# c!t!+"
Co66!))!o+e o2 I+te+a* Reve+0e v.
Co0t o2 A((ea*)# C!t1 T0)t Ba+B!+"
Co(oat!o+ a+d Co0t o2 Ta@ A((ea*)# G.R.
No. $/--$$# >0*1 3$# $%%.'
BI8$ 'istraint$ Prescription of t#e Action
(22)
<r! /ebastian is a Iilipino seaman
employed by a 8orwegian company which
is engaged exclusively in international
shipping! ?e and his wife who
manages their business *led a 2oint
income tax return for 4JJL on <arch 4,
4JJ=! ;fter an audit of the return the AI>
issued on ;pril :1 :114 a de*ciency
income tax assessment for the sum of
&:,1!111!11 inclusive of interest and
penalty! Ior failure of <r! and <rs!
/ebastian to pay the tax within the period
stated in the notice of assessment the AI>
issued on ;ugust 4J :114 warrants of
distraint and levy to enforce collection of
the tax!
;! What is the rule of income taxation
with respect to
<r! /ebastianBs income in 4JJL as a
seaman on board the
8orwegian vessel engaged
in international shipping?
3xplain your answer! (:-)
SUGGESTED
ANSWER)
;! "he income of <r! /ebastian as a
seaman is considered as income of a non%
resident citi$en derived from without the
&hilippines! "he total gross income in E/
dollars (or if in other foreign currency its
dollar eDuivalent) from without shall be
declared by him for income tax purposes
using a separate income tax return which
will not include his income from business
derived within (to be covered by another
return)! ?e is entitled to deduct from his
dollar gross income a personal exemption
of W0,11 and foreign national income
taxes paid to arrive at his ad2usted income
during the year! ?is ad2usted income will be
sub2ect to the graduated tax rates of 4- to
+-! (,ec. &% (b) Tax !ode of
%*/.A9B %%-/@ as amended
by 9B %**").
Q8ote: "he bar candidates are not expected to
be familiar with tax history! (onsidering that
this is already the fourth year of
implementation of the "ax (ode of 4JJL bar
candidates were taught and prepared to
answer Duestions based on the present law! It
is therefore reDuested that the examiner be
more lenient in chec#ing the answers to this
Duestion! &erhaps an answer based on the
present law be given full credit!R
A! If you are the lawyer of <r! and <rs!
/ebastian what possible defense or
defenses will you raise in behalf of
your clients against the action of the
AI> in enforcing collection of the tax
by the summary remedies of
warrants of distraints and levy?
3xplain your answer! (+-)
SUGGESTED ANSWER)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
.. of 73
A! I will raise the defense of prescription!
"he right of the
AI> to assess prescribes after three years
counted from the last day prescribed by law
for the *ling of the income tax returns when
the said return is *led on time! (/ection
:1+ 8I>()! "he last day for *ling the
4JJL income tax
return is ;pril 4, 4JJ=! /ince the
assessment was issued only on ;pril :1
:114 the AI>Bs right to assess has
already prescribed!
BI8$ Fa"se (s) Frau&u"ent 8eturn (1996)
'istinguish a false return from a
fraudulent return!
SUGGESTED ANSWER)
"he distinction between a false return and a
fraudulent return is that the *rst merely
implies a deviation from the truth or fact
whether intentional or not whereas the
second is intentional and deceitful with the
sole aim of evading the correct tax due
(AG+a 0). Co66!))!o+e# L=3/4-%#
A0"0)t 38# $%&.)!
A+TERNATI1E ANSWER)
; false return contains deviations from the
truth which may be due to mista#es
carelessness or ignorance of the person
preparing the return! ; fraudulent return
contains an intentional wrongdoing with the
sole ob2ect of avoiding the tax and it
may consist in the
intentional underdeclaration of income
intentional overdeclaration of deductions or
the recurrence of both! ; false return is not
necessarily tainted with fraud because the
fraud contemplated by law is actual and not
constructive! ;ny deviation from the truth
on the other hand whether intentional or
not constitutes falsity! (AG+a v).
Co66!))!o+e# L=3/4-%# A0"0)t 38#
$%&.)
BI8$ Huris&iction$ 8e(ie1 8u"ings of t#e !ommissioner
(26)
<r! ;braham 3ugenio a pawnshop
operator after having
been reDuired by the >evenue 'istrict
OFicer to pay value added tax pursuant to
a >evenue <emorandum Order (><O) of
the (ommissioner of Internal >evenue *led
with the >egional "rial (ourt an action
Duestioning the validity of the ><O! If you
were the 2udge will you dismiss the case?
(,-)
SUGGESTED ANSWER)
7es! "he ><O is in reality a ruling of the
(ommissioner in implementing the
provisions of the "ax (ode on the taxability
of pawnshops! Murisdiction to review rulings
of the (ommissioner is lodged with the
(ourt of "ax ;ppeals and not with the
>egional "rial (ourt (CIR v. >o)eF+a Lea*#
G.R. No. $$8.4%# Nove67e $5# 3//3A Ta@
Re2o6 Act# RA 5.3.# T!t*e I# Sec. . 9$%%&:'.
(NOTA BENE: This concept pertains to
the 2AT law
which is excluded from the bar coverage
#uidelines for &((.
3ar 4xaminations )une %- &((.)
BI8$ Prescripti(e Perio&$ Assessment$ Frau&u"ent 8eturn
(22)
<r! (astro inherited from his father who died
on Mune 41
4JJ0 several pieces of real property in <etro
<anila! "he estate tax return was *led and
the estate tax due in the amount of
&:,1!111!11 was paid on 'ecember 1H 4JJ0!
"he "ax Iraud 'ivision of the AI>
investigated the case on the basis of
confidential information given by <r! /antos
on Manuary 1H 4JJ= that the return *led by
<r! (astro was fraudulent and that he
failed to declare all
properties left by his father with
intent to evade
payment of the correct tax! ;s a result a
deficiency estate tax assessment for
&4:,1111!11 inclusive of ,1- surcharge
for fraud interest and penalty was
issued against him on Manuary 41 :114!
<r! (astro protested the assessment on the
ground of prescription!
;! 'ecide <r! (astroBs
protest! (:-)
SUGGESTED
ANSWER)
;! "he protest should be resolved
against <r! (astro! What was *led is a
fraudulent return ma#ing the prescriptive
period for assessment ten (41) years from
discovery of the fraud (/ection ::: 8I>()!
;ccordingly the assessment was issued
within that prescriptive period to ma#e an
assessment based on a fraudulent return!
A! What legal reDuirementOs must <r!
/antos comply with so that he can
claim his reward? 3xplain! (+-)
SUGGESTED
ANSWER)
"he legal reDuirements that must be
complied by <r! /antos to entitle him to
reward are as follows:
4) ?e should voluntarily *le a
con*dential information
under oath with the 5aw 'ivision of the
Aureau of Internal >evenue alleging
therein the specific violations
constituting fraudC
:) "he information must not yet be in the
possession of
the Aureau of Internal >evenue or
refer to a case already pending or
previously investigated by the Aureau
of Internal >evenueC
+) <r! /antos should not be a government
employee or
a relative of a government employee
within the sixth degree of
consanguinityC and
0) "he information must result to
collections of revenues andOor *nes
and penalties! (/ec! :=: 8I>()
BI8$ Prescripti(e Perio&$ !rimina" Action
(26)
.erry was being prosecuted by the AI>
for failure to pay
his income tax liability for (alendar 7ear
4JJJ despite
several demands by the AI> in :11:! "he
Information was *led with the >"( only
last Mune :11H! .erry *led a motion to
Duash the Information on the ground of
prescription the Information having been
*led beyond the ,%year reglementary
period! If you were the 2udge will you
dismiss the Information? Why? (,-)
SUGGESTED
ANSWER)
8o! "he trial court can exercise
2urisdiction! &rescription of a criminal
action begins to run from the day of the
violation of the law! "he crime was
committed when .erry willfully refused to
pay despite repeated demands in
:11:! /ince the information was *led in
Mune :11H the
criminal case was instituted within the *ve%
year period reDuired by law (T0(aG v. U*e(#
G.R. No. $3&&&&# Octo7e
$# $%%%A Sect!o+
35$# NIRC'.
BI8$ Taxpayer: !i(i" Action ; !rimina" Action (22)
<inolta &hilippines Inc! (<inolta) is an
3&K;%registered enterprise en2oying
preferential tax treatment under a
special law! ;fter investigation of its
withholding tax returns for the taxable
year 4JJL the AI> issued a deficiency
withholding tax assessment in the amount
of &4,1!111!11! On <ay 4, 4JJJ
because of *nancial diFiculty the
de*ciency tax remained unpaid as a result
of which the assessment became *nal and
executory! "he
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
.6 of 73
AI> also found that in violation of the
provisions of the
8ational Internal >evenue (ode <inolta did
not *le its *nal corporate income tax
return for the taxable year
4JJ= because it allegedly incurred net loss
from its operations! On <ay 4L :11: the
AI> *led with the >egional "rial (ourt an
action for collection of the deficiency
withholding tax for 4JJL!
;! Will the AI>Bs action for collection
prosper? ;s counsel of <inolta what
action will you ta#e? 3xplain your
answer! (,-)
SUGGESTED ANSWER)
;! 7es AI>Bs action for collection will
prosper because the assessment is already
*nal and executory it can already be
enforced through 2udicial action!
;s counsel of <inolta I will introduce
evidence that the income payment was
reported by the payee and the income
tax was paid thereon in 4JJL so that my
client may only be allowed to pay the civil
penalties for non% withholding pursuant to
><O 8o! +=%=+!
QNote: 6t is not clear whether this
is a case of non-
withholding; underwithholding or non-
remittance of tax withheld. As such
the tax counsel may be open to other
remedies against the assessment!R
A! <ay criminal violations of the "ax
(ode be compromised? If <inolta
ma#es a voluntary oFer to
compromise the criminal violations for
non% *ling and non%payment of taxes
for the year 4JJ= may the
(ommissioner accept the oFer?
3xplain (,-)
SUGGESTED ANSWER)
A! ;ll criminal violations of the "ax
(ode may be compromised except those
already *led in court or those involving
fraud (/ection :10 8I>()! ;ccordingly if
<inolta ma#es a voluntary oFer to
compromise the criminal violations for
non%filing and non%payment of taxes for
the year 4JJ= the (ommissioner may
accept the oFer which is allowed by law!
?owever if it can be established that a tax
has not been paid as a conseDuence of non%
*ling of the return the civil liability for
taxes may be dealt with independently of
the criminal violations! "he compromise
settlement of the criminal violations will not
relieve the taxpayer from its civil liability!
Aut the civil liability for taxes may also be
compromised if the *nancial position of the
taxpayer demonstrates a clear inability to
pay the tax!
!ustom: Cio"ation of Tax ; !ustom 'uties (22)
"he (ollector of (ustoms of the &ort of
(ebu issued
warrants of sei$ure and detention against the
importation of machineries and eDuipment
by 55' Import and 3xport (o! (55') for
alleged nonpayment of tax and customs
duties in violation of customs laws! 55' was
noti*ed of the sei$ure but before it could be
heard the (ollector of (ustoms issued a
notice of sale of the articles! In order to
restrain the (ollector from carrying out the
order to sell 55' filed with the (ourt of "ax
;ppeals a petition for review with application
for the issuance of a writ of prohibition! It
also *led with the ("; an appeal for refund
of overpaid taxes on its other importations of
raw materials which has been pending
with the (ollector of (ustoms! "he
Aureau of
(ustoms moved to dismiss the case for lac#
of 2urisdiction of the (ourt of "ax ;ppeals!
;! 'oes the (ourt of "ax ;ppeals have
2urisdiction over the petition for
review and writ of prohibition?
3xplain (+-)
SUGGESTED
ANSWER)
;! 8o because there is no decision
as yet by the (ommissioner of (ustoms
which can be appealed to the (";! 8either
the remedy of prohibition would lie
because the ("; has not acDuired
any appellate 2urisdiction over the sei$ure
case! "he writ of prohibition being merely
ancillary to the appellate 2urisdiction
the ("; has no 2urisdiction over it until it
has acDuired 2urisdiction on the petition for
review! /ince there is no appealable
decision the ("; has no 2urisdiction over
the petition for review and
writ of prohibition!
(Co66!))!o+e o2 C0)to6) v.
A*!B(a*a# 8- SCRA 3/5 9$%&/:)!
A! Will an appeal to the ("; for tax
refund be possible?
3xplain
(:-)
SUGGESTED
ANSWER)
A! 8o because the (ommissioner of
(ustoms has not yet rendered a decision
on the claim for refund! "he 2urisdiction of
the (ommissioner and the ("; are not
concurrent in so far as claims for refund
are concerned! "he only exception is when
the (ollector has not acted on the
protested payment for a long time the
continued inaction of the (ollector or
(ommissioner should not be allowed to
pre2udice the taxpayer! (8estle &hils! Inc!
v! (ourt of ;ppeals .> 8o! 4+0440 Muly H
:114)!
!ustoms$ Basis$ Automatic 8e(ie1
(22)
Whenever the decision of the (ollector
of (ustoms is
adverse to the government it is
automatically elevated to the
(ommissioner for review and if it is
aFirmed by him it is automatically
elevated to the /ecretary of Iinance for
review! What is the basis of the
automatic review procedure in the
Aureau of (ustoms? 3xplain your
answer! (,-)
SUGGESTED
ANSWER)
;utomatic review is intended to protect the
interest of the .overnment in the
collection of taxes and customs duties in
sei$ure and protest cases! Without such
automatic review neither the
(ommissioner of (ustoms nor the
/ecretary of Iinance would #now about the
decision laid down by the (ollector favoring
the taxpayer! "he power to decide sei$ure
and protest cases may be abused if no
chec#s are instituted! ;utomatic review is
necessary because nobody is expected to
appeal the decision of the (ollector which is
favorable to the taxpayer and adverse to
the .overnment! "his is the reason why
whenever the decision of the (ollector is
adverse to the .overnment the said
decision is automatically elevated to the
(ommissioner for reviewC and if such
decision is aFirmed by the (ommissioner
the same shall be automatically elevated to
and be *nally reviewed by the /ecretary of
Iinance (DaoBa)!+ v. Co66!))!o+e o2
C0)to6)# $5/
SCRA 4%$
9$%5%:)!
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
.2 of 73
'e"in3uent Tax 8eturn (199=)
When is a revenue tax considered
delinDuent? Q+-)
SUGGESTED ANSWER)
; revenue tax is considered delinDuent
when it is unpaid after the lapse of the last
day prescribed by law for its payment!
5i#ewise it could also be considered as
delinDuent where an assessment for
de*ciency tax has become *nal and the
taxpayer has not paid it within the period
given in the notice of assessment!
Huris&iction: !ustoms (s) !TA (2)
a) On the basis of a warrant of sei$ure
and detention
issued by the (ollector of (ustoms for the
purpose of enforcing the "ariF and
(ustoms 5aws assorted brands of
cigarettes said to have been illegally
imported into the &hilippines were
sei$ed from a store where they were
openly oFered for sale! 'issatisfied with
the decision rendered after hearing by the
(ollector of (ustoms on the con*scation
of the articles the importer *led a
petition for review with the (ourt of "ax
;ppeals! "he (ollector moved to dismiss
the petition for lac# of Murisdiction! >ule
on the motion! (:-)
SUGGESTED ANSWER)
<otion granted! "he (ourt of "ax
;ppeals has 2urisdiction only over decisions
of the (ommissioner of (ustoms in cases
involving sei$ures detention or release of
property aFected! (/ec! L >!;! 8o! 44:,)!
"here is no decision yet of the
(ommissioner which is sub2ect to review by
the (ourt of "ax ;ppeals!
A+TERNATI1E ANSWER)
<otion granted! "he (ourt of "ax ;ppeals
has no 2urisdiction because there is no
decision rendered by the (ommissioner of
(ustoms on the sei$ure and forfeiture case!
"he taxpayer should have appealed the
decision rendered by the (ollector within
*fteen (4,) days from receipt of the decision
to the (ommissioner of (ustoms! "he
(ommissionerSs adverse decision would
then be the sub2ect of an appeal to the (ourt
of "ax ;ppeals!
b) Ender the same facts could the importer
*le an action in the >egional "rial (ourt
for replevin on the ground that the
articles are being wrongfully detained by
the (ollector of (ustoms since the
importation was not illegal and therefore
exempt from sei$ure? 3xplain! (+-)
SUGGESTED ANSWER)
8o! "he legislators intended to divest the
>egional "rial (ourts of the 2urisdiction to
replevin a property which is a sub2ect of
sei$ure and forfeiture proceedings for
violation of the "ariF and (ustoms (ode
otherwise actions for forfeiture of property
for violation of the (ustoms laws could easily
be undermined by the simple device of
replevin! (De *a F0e+te v. De Ve1a# et.
a*# $3/ SCRA
.44
)
"here should be no unnecessary hindrance on
the governmentBs drive to prevent smuggling
and other frauds upon the (ustoms!
Iurthermore the >egional "rial (ourt do not
have Murisdiction in order to render eFective
and eFicient the collection of Import and
export duties due the /tate which enables
the government to carry out the
functions It has been Instituted to
perform! (>ao#
et a*# Co0t o2 A((ea*)# et a*# a+d
co6(a+!o+ ca)e#
3.% SCRA
84# .8)
/5<: !o""ection of TaxesF Fees ; !#arges
(199,)
.ive the remedies available to local
government units to enforce the collection
of taxes fees and charges? SUGGESTED
ANSWER)
"he remedies available to the local
government units to enforce collection of
taxes fees and charges are:
4) ;'<I8I/">;"I63 >3<3'I3/ of
distraint of
personal property of whatever #ind
whether tangible or intangible and levy
of real property and interest thereinC
and
:) ME'I(I;5 >3<3'7 by institution of
an ordinary
civil action for collection with the
regular courts of proper 2urisdiction!
Tax Amnesty (s) Tax 2xemption
(21)
'istinguish a tax amnesty from a tax
exemption! (+-)
SUGGESTED
ANSWER)
"ax amnesty is an immunity from all
criminal civil and administrative liabilities
arising from nonpayment of taxes! It is a
general pardon given to all taxpayers! It
applies only to past tax periods hence of
retroactive application! (Peo(*e v.
Co)to+edo# G.R. No. L=.-55$# $%55)!
"ax exemption is an immunity from the
civil liability only! It is an immunity or
privilege a freedom from a charge or
burden to which others are
sub2ected! (F*oe v. S<e!da+# $8&
I+d. 35# 8- ME 8-4)! It is generally
prospective in application!
Taxpayer: A&ministrati(e ; Hu&icia" 8eme&ies (2)
'escribe separately the procedures on the
legal remedies under the "ax (ode
available to an aggrieved taxpayer both
at the administrative and 2udicial levels!
(,-) SUGGESTED ANSWER)
"he legal remedies of an aggrieved
taxpayer under the "ax (ode both at the
administrative and 2udicial levels may be
classi*ed into those for a))e))6e+t
co**ect!o+ and e20+d!
"he procedures for the
ADMINISTRATIVE REMEDIES for
ASSESSMENT are as follows:
a! ;fter receipt of the &re%;ssessment
8otice he must within *fteen (4,) days
from receipt explain why no additional
taxes should be assessed against him!
b! If the (ommissioner of Internal
>evenue issues an assessment notice
the taxpayer must administratively
protest or dispute the assessment by
*ling a motion for reconsideration or
reinvestigation within thirty (+1) days
from receipt of the notice of
assessment! (0th par!! /ec! ::= 8I>( of
4JJL)
c! Within sixty (H1) days from *ling of the
protest the taxpayer shall submit
all relevant supporting
documents!
"he >UDICIAL REMEDIES of an
aggrieved taxpayer relative to an
ASSESSMENT NOTICE are as follows:
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
.4 of 73
a! Where the (ommissioner of Internal
>evenue has
not acted on the taxpayerBs protest
within a period of one hundred eighty
(4=1) days from submission of all
relevant documents then the taxpayer
has a period of thirty (+1) days from the
lapse of said 4=1 days within which to
interpose a petition for review with
the (ourt of "ax ;ppeals!
b! /hould the (ommissioner deny the
taxpayerBs protest then he has a period
of thirty (+1) days from receipt of said
denial within which to interpose a
petition for review with the (ourt of "ax
;ppeals!
In both cases the taxpayer must apply with
the (ourt of "ax ;ppeals for the Issuance of
an In2unctive writ to en2oin the Aureau of
Internal >evenue from collecting the
disputed tax during the pendency of the
proceedings!
NOTE: ; :110 ;mendment % "he
decision of the division of ("; is in turn
appeallable within *fteen (4,) days to the
("; en banc! "he decision of the ("; en
banc is directly appeallable to the /upreme
(ourt on Duestion of law on certiorari!
"he employment by the Aureau of Internal
>evenue of any of the Ad6!+!)tat!ve
Re6ed!e) for the co**ect!o+ o2 t<e ta@
li#e distraint levy etc! may be
administratively appealed by the taxpayer to
the (ommissioner whose decision is
appealable to the (ourt of "ax ;ppeals
under other matter arising under the
provisions of the 8ational Internal >evenue
(ode!
"he 2udicial appeals starts with the (ourt of
"ax ;ppeals and continues in the same
manner as shown above!
/hould the Aureau of Internal >evenue
decide to utili$e its Mudicial tax remedies for
collecting the taxes by means of an
ordinary suit *led with the regular courts
for the collection of a sum of money the
taxpayer could oppose the same going up
the ladder of 2udicial processes from the
<unicipal "rial (ourt (as the case may be)
to the >egional "rial (ourt to the (ourt of
;ppeals thence to the /upreme (ourt!
"he remedies of an aggrieved taxpayer on a
claim for refund is to appeal the adverse
decision of the (ommissioner to the ("; in
the same manner outlined above!
Taxpayer: Assessment: Protest: !"aims for refun& (2)
On Mune 4H 4JJL the Aureau of Internal
>evenue (AI>) issued against the 3state of
Mose de la (ru$ a notice of deficiency estate
tax assessment inclusive of surcharge
interest and compromise penalty! "he
3xecutor of the 3state of Mose de la (ru$
(3xecutor) *led a timely protest against the
assessment and reDuested for waiver of the
surcharge interest and penalty! "he protest
was denied by the (ommissioner of Internal
>evenue ((ommissioner) with *nality on
/eptember 4+ 4JJL! (onseDuently the
3xecutor was made to pay the deficiency
assessment on October 41 4JJL! "he
following day the 3xecutor *led a &etition
with the (ourt of "ax ;ppeals ((";) praying
for
the refund of the surcharge
interest and
compromise penalty! "he ("; too#
cogni$ance of the case and ordered the
(ommissioner to ma#e a refund! "he
(ommissioner *led a &etition for >eview
with the (ourt of ;ppeals assailing the
2urisdiction of the ("; and the Order to
ma#e refund to the 3state on the ground
that no claim for refund was filed with the
AI>!
A. Is the stand of the (ommissioner
correct? >eason! (:-)
SUGGESTED
ANSWER)
7es! "here was no claim for refund or
credit that has been duly *led with the
(ommissioner of Internal >evenue which is
reDuired before a suit or proceeding can
be *led in any court (/ec! ::J! 8I>( of
4JJL)! "he denial of the claim by the
(ommissioner is the one which will vest
the (ourt of "ax ;ppeals 2urisdiction over
the refund case should the taxpayer decide
to appeal on time!
B. Why is the *ling of an administrative
claim with the
AI> necessary? (+-)
SUGGESTED
ANSWER)
"he *ling of an administrative claim for
refund with the
AI> is necessary
in order:
4) "o aFord the (ommissioner an
opportunity to consider the claim and
to have a chance to correct the
errors of subordinate oFicers
(Go+Ga*e) v. CTA# et a*# $. SCRA
&%)C and
:) "o notify the .overnment that such
taxes have been Duestioned and the
notice should be borne in
mind in estimating the revenue
available for expenditures! (Be6eMo
v. Co**ecto# G.R. No. L=
8/35. >0*1 3%# $%4/)
Taxpayer: Assessment$ In@unction
(2*)
>> disputed a deficiency tax assessment
and upon receipt
of an adverse decision by the
(ommissioner of Internal
>evenue *led an appeal with the (ourt of
"ax ;ppeals! While the appeal is pending
the AI> served a warrant of levy on the
real properties of >> to enforce the
collection of the disputed tax! .ranting
arguendo that the AI> can legally levy on
the properties what could >> do to stop
the process? 3xplain briefly! (,-)
SUGGESTED
ANSWER)
>> should *le a motion for in2unction with
the (ourt of "ax ;ppeals to stop the
administrative collection process! ;n appeal
to the ("; shall not suspend the
enforcement of the tax liability unless a
motion to that eFect shall have been
presented in court and granted by it on the
basis that such collection will 2eopardi$e the
interest of the taxpayer or the .overnment
(P!ova+o v. CIR# $. SCRA 583
9$%-4:)!
"he ("; is empowered to suspend the
collection of internal revenue taxes and
customs duties in cases pending appeal only
when: (4) in the opinion of the court the
collection by the AI> will 2eopardi$e the
interest of the .overnment andOor the
taxpayerC and (:) the taxpayer is willing to
deposit the amount being collected or to *le
a surety bond for not more than double the
amount of the tax to be fixed by the court
(,ection %% )$.A. No. %%&-).
Taxpayer: BI8 Au&it or In(estigation (1999)
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
.9 of 73
; (o! a &hilippine corporation is a big
manufacturer of
consumer goods and has several suppliers of
raw materi% als! "he AI> suspects that some
of the suppliers are not properly reporting
their income on their sales to ; (o! "he
(I> therefore:
4) Issued an access letter to ; (o! to
furnish the AI>
information on sales and payments to
its suppliers!
:) Issued an access letter to a ban#
((@ Aan#) to furnish the AI> on
deposits of some suppliers of ; (o! on
the alleged ground that the suppliers
are committing tax evasion!
; (o! @ Aan# and the suppliers have not
been issued by the AI> letter of authority to
examine! ; (o! and @ Aan# believe that the
AI> is on a "fishing expedition" and come to
you for counsel! What is your advice? (41-)
SUGGESTED ANSWER)
I will advise ; (o! and A (o! that the AI> is
2usti*ed only in getting information from the
former but not from the latter! "he AI> is
authori$ed to obtain information from other
persons other than those whose internal
revenue tax liability is sub2ect to audit or
investigation! ?owever this power
shall not be construed as
granting the (ommissioner the
authority to inDuire into ban# deposits!
(,ection -. N6$!).
Taxpayer: !ity Boar& of Assessment 'ecision$ -#ere to
appea" (1999)
; (o! a &hilippine corporation is the
owner of machin%
ery eDuipment and *xtures located at
its plant in
<untinlupa (ity! "he (ity ;ssessor
characteri$ed all these properties as real
properties sub2ect to the real property tax!
; (o! appealed the matter to the
<untinlupa Aoard of ;ssessment ;ppeals!
"he Aoard ruled in favor of the (ity! In
accordance with >; 44:, (;n ;ct creating
the (ourt of "ax ;ppeals)! ; (o! brought
a petition for review before the ("; to
appeal the decision of the (ity Aoard of
;ssessment ;ppeals! Is the &etition for
>eview proper? 3xplain! (,-)
SUGGESTED ANSWER)
8o! "he (";Ss devoid of 2urisdiction to
entertain appeals from the decision of the
(ity Aoard of ;ssessment ;ppeals! /aid
decision is instead appealable to the (entral
Aoard of ;ssessment ;ppeals which under
the 5ocal .overnment (ode has appellate
2urisdiction over deci% sions of 5ocal Aoard
of ;ssessment ;ppeals! (Ca*te@ P<!*)# 2oe.
v. Ce+ta* Boad o2 A))e))6e+t A((ea*)#
L=
4/.--# Ma1 8$#
$%53)!
Taxpayer: !"aim for 8efun&$ Proce&ure (22)
;! What must a taxpayer do in order to claim
a refund of
or tax credit for taxes and penalties which
he alleges to
have been erroneously illegally or
excessively assessed or collected? (+-)
SUGGESTED ANSWER)
"he taxpayer must comply with the following
procedures in claiming a refund of or tax
credit for taxes and penalties which he
alleges to have been erroneously illegally or
excessively assessed or collected:
:! ?e should *le a written claim for
refund with the
(ommissioner within two years after
the date of payment of the tax or penalty
(/ec! :10 8I>()C
+! "he claim *led must state a
categorical
demand for reimbursement (Be6eMo
v. Co**ecto# 5&
P<!*. %-
9$%4/:'.
0! "he suit or proceeding for
recovery must be commenced in
court within two years from date of
payment of the tax or penalty
regardless of any supervening event
that will arise after payment (/ec!
::J
8I>()!
ANote: 6f the answer given is only number
% it is suggested that the same shall be
given full credit considering that this is
the only re7uirement for the
!ommissioner to ac7uire 1urisdiction
over the claim.@
A! (an the (ommissioner grant a refund
or tax credit even without a written
claim for it? (:-)
SUGGESTED
ANSWER)
A! 7es! When the taxpayer *les a return
which on its face shows an overpayment of
the tax and the option to refundO claim a
tax credit was chosen by the taxpayer the
(ommissioner shall grant the refund or tax
credit without the need for a written claim!
"his is so because a return *led showing
an overpayment shall be considered as a
written claim for credit or refund!
(,ees. '. and &(" N6$!)!
<oreoverthe law providesthat
the (ommissioner may even
without a written claim therefor refund or
credit any tax where on the face of the
return upon which payment was made
such payment appears clearly to have been
erroneously paid! (,ec. &&* N6$!)!
Taxpayer: 'eficiency Income Tax
(1999)
Ausinessman /tephen 7ang *led an
income tax return for
4JJ+ showing business net income of
&+,1111!11 on which he paid an income
tax of &H4111!11! ;fter *ling the return
he reali$ed that he forgot to include an
item of business income in 4JJ+ for
&,1!111!11! Aeing an honest taxpayer he
included this income in his return for
4JJ0 and paid the corresponding income
tax thereon! In the examination of his 4JJ+
return the AI> examiner found that
/tephen 7ang failed to report this item of
&,1!111!11 and assessed him a de*ciency
income tax on this item plus a ,1- fraud
surcharge!
4) Is the examiner
correct? 3xplain!
:) If you were the lawyer of /tephen 7ang
what would
you have advised your client before he
included in his 4JJ0 return the amount
of &,1!111!11 as 4JJ+ income to avoid
the fraud surcharge? 3xplain!
+) (onsidering that /tephen 7ang had
already been
assessed a deficiency income tax for
4JJ+ for his failure to report the
&,1!111!11 income what would you
advise him to do to avoid the penalties
for tax delinDuency? 3xplain!
0) What would you advise /tephen 7ang
to do with regard to the income tax he
paid for the &,1!111!11 in his 4JJ0
return? In case your remedy fails what
is your other recourse? 3xplain!
SUGGESTED ANSWERS)
4) "he examiner is correct in assessing
a de*ciency income tax for taxable year
4JJ+ but not in imposing the
,1- fraud surcharge! "he amount of all
items of gross
income must be included in gross income
during the year in which received or
reali$ed (/ec! += 8I>()! "he ,1-
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
60 of 73
fraud surcharge attaches only if a false
or fraudulent
return is willfully made by <r! 7ang
(/ec!:0= 8I>()! "he fact that <r! 7ang
included the income in his 4JJ0 return
belies any claim of willfulness but is rather
indicative of an honest mista#e which was
sought to be recti*ed by a subseDuent act
that is the *ling of the 4JJ0 return!
:) <r! 7ang should have amended his 4JJ+
Income tax return to allow for the inclusion
of the &,1!111 income during the taxable
period it was reali$ed!
+) <r! 7ang should *le a protest
Duestioning the ,1- surcharge and as# for
the abatement thereof! A+TERNATI1E ANSWER)
<r! 7ang should pay the de*ciency income
tax on or before the day prescribed for its
payment per notice of demand! ;fter
payment and within two years thereafter
he should *le a claim for refund of taxes
erroneously paid to recover the excessive
surcharge imposed!
0) <r! 7ang should *le a written claim for
refund with the (ommissioner of Internal
>evenue of the taxes paid on the &,1!111
income included in 4JJ0 within two years
from payment pursuant to /ection :10(+)
of the "ax (ode! /hould this remedy fail in
the administrative level a 2udicial claim for
refund can be instituted before the
expiration of the two year period!
Taxpayer: 2x#austion of A&ministrati(e 8eme&ies (199,)
(a) ; taxpayer received on 4, Manuary
4JJH an as%
sessment for an internal revenue tax
de*ciency! On
41 Iebruary 4JJH the taxpayer
forthwith *led a
petition for review with the (ourt of
"ax ;ppeals! (ould the "ax (ourt
entertain the petition?
(b) Ender the above factual setting the
taxpayer instead of Duestioning the
assessment he received on 4,
Manuary 4JJH paid on 14 <arch 4JJH
the "de*ciency
tax" assessed! "he taxpayer reDuested a
refund from the (ommissioner by
submitting a written claim on
14 <arch 4JJL! It was denied! "he
taxpayer on 4,
<arch 4JJL *led a petition for
review with the
(ourt of ;ppeals! (ould the
petition still be entertained?
SUGGESTED ANSWER)
(a) 8o! Aefore taxpayer can avail of Mudicial
remedy he must *rst exhaust administrative
remedies by *ling a protest within +1 days
from receipt of the assessment! It is the
(ommissionerBs decision on the protest that
give the "ax (ourt 2urisdiction over the case
provided that the appeal is *led within +1
days from receipt of the (ommissionerBs
decision! ;n assessment by the AI> is not
the (ommissionerBs decision from which a
petition for review may be *led with the
(ourt of "ax ;ppeals! >ather it is the action
ta#en by the (ommissioner in response to the
taxpayerBs protest on the assessment that
would constitute the appealable decision
(/ection L >;
44:,)!
(b) 8o the petition for review can not be
entertained by the (ourtof
;ppeals since decisions of the
(ommissioner on cases involving
claim for tax
refunds are within the exclusive and
primary 2urisdiction of the (ourt of "ax
;ppeals (/ection L!>;44:,)!
Taxpayer: Fai"ure to -it##e"& ; 8emit Tax
(2)
; domestic corporation failed to withhold
and remit the tax on income received from
&hilippine sources by a non% resident
foreign corporation! In addition to the civil
penalties provided for under the "ax (ode
a compromise penalty was imposed for
violation of the withholding tax provisions!
<ay the (ommissioner of Internal >evenue
legally enforce the collection of
compromise penalty? (,-)
SUGGESTED
ANSWER)
8o! "here is no showing that the
compromise penalty was imposed by the
(ommissioner of Internal >evenue with
the agreement and conformity of the
taxpayer! (?o+de Mec<a+!ca*
E+"!+ee!+" Co(oat!o+ 0. Co0t o2
Ta@ A((ea*)# et. a*.# -. SCRA 444)!
Taxpayer: 7I8! (s) T!! 8eme&ies
(1996)
(ompare the taxpayerBs remedies
under the 8ational
Internal >evenue (ode and the "ariF and
(ustoms (ode!
SUGGESTED
ANSWER)
"he taxpayerBs remedies under the
NATIONAL INTERNAL REVENUE
CODE may be categori$ed into
remedies before payment and
remedies after payment! "he remedy
BEFORE PADMENT consists of (a)
Ad6!+!)tat!ve Re6ed1 which is the
*ling of protest within +1 days from
receipt of assessment
a
n
d
(b) >0d!c!a* Re6ed1 which is the
appeal of the adverse
decision of the (ommissioner on the
protest with the
(ourt of "ax ;ppeals and *nally with
the /upreme
(o
urt!
"he remedy AFTER PADMENT
is availed of
(c) by paying the assessed tax within
+1 days from
receipt of
assessment and
(d) the *ling of a claim for refund or tax
credit of these
taxes on grounds that they are
erroneously paid within two years from
date of payment!
(e) 6f there is a denial of the claim appeal
to the ("; shall be made within +1 days
from denial but within two years from
date of payment!
If the (ommissioner fails to act on
the claim for
refund or tax credit and the two%year
period is about to expire the
taxpayer should consider the
continuous inaction of the
(ommissioner as a denial and
elevate the case to the ("; before
the expiration of the two%year period!
Ender the Ta!22 a+d C0)to6) Code
taxpayerBs reme% dies arise only after
payment of duties!
0) "he administrative remedies consist of
*ling a claim for refund which may ta#e
the form of abatement or drawbac#!
,) "he taxpayer can also *le a protest
within 4, days
from payment if he disagrees with the
ruling or decision of the (ollector of
(ustoms regarding the legality or
correctness of the assessment of
customs duties!
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
61 of 73
H) If the decision of the (ollector is
adverse to the
taxpayer he can notify the (ollector
within 4, days from receipt of said
decision of his desire to have his case
reviewed by the (ommissioner!
"he decision of the (ollector on the
taxpayerBs
protest if adverse to the
.overnment is automatically
elevated to the (ommissioner for
reviewC and if such decision is
aFirmed by the (ommissioner the
same shall be automatically elevated
to and *nally reviewed by the
/ecretary of Iinance!
>esort to 2udicial relief can be
had by the taxpayer by appealing
the decision of the (ommissioner or
of the /ecretary of Iinance (for
cases sub2ect to automatic review)
within +1 days from the
promulgation of the adverse decision
to the (";!
Taxpayer: %(er1it#o"&ing !"aim for 8efun& (1999)
; (o! is the wholly owned subsidiary of A
(o! a non% resident .erman company! ;
(o! has a trademar# licensing agreement
with A (o! On Ieb! 41 4JJ, ; (o! remitted
to A (o! royalties of & 41111111 which ;
(o! sub2ected to a withholding tax of
:,- or &:,11111! Epon advice of
counsel ; (o! reali$ed that the proper
withholding tax rate is 41-! On <arch :1
4JJH ; (o! *led a claim for refund of
&:!,11!111 with the AI>! "he AI> denied
the claim on 8ov! 4, 4JJH! On 8ov! :=
4JJH ; (o! *led a petition for review with
the (";! "he
AI> attac#ed the capacity of ; (o! as agent
to bring the refund case! 'ecide the issue!
(,-)
SUGGESTED ANSWER)
; (o! the withholding agent of the non%
resident foreign corporation is entitled to
claim the refund of excess withholding tax
paid on the income of said corporation in
the &hilippines! Aeing a withholding agent
it is the one held liable for any violation of
the withholding tax law should such a
violation occur! In the same vein it should
be allowed to claim a refund in case of
overwitholding! (CIR v. ?a+de P<!*). I+c.#
GR No. -58&5# A(!* $4# $%55#
$-/ SCRA 4&8A CIR v. Pocte C Ga67*e
PMC# 3O. SCRA
8&
&)!
Taxpayer: Prescripti(e Perio&: Suspen&e& (2)
<r! >eyes a Iilipino citi$en engaged in
the real estate
business *led his 4JJ0 income tax return
on <arch :1
4JJ,! On 'ecember 4, 4JJ, he left the
&hilippines as an
immigrant to 2oin his family in (anada!
;fter the investigation of said returnOthe
AI> issued a notice of deficiency income
tax assessment on ;pril 4, 4JJ=! <r! >eyes
returned to the &hilippines as a
bali#bayan on 'ecember = 4JJ=! Iinding
his name to be in the list of delinDuent
taxpayers he *led a protest against
the assessment on the ground that he did
not receive the notice of assessment and
that the assessment had prescribed! Will
the protest prosper? 3xplain! (,-) SUGGESTED
ANSWER)
8o! &rescription has not set in because
the period of limitations for the Aureau of
Internal >evenue to issue an assessment was
SUSPENDED during the time that <r! >eyes
was out of the &hilippines or from the
period
'ecember 4, 4JJ, up to
'ecember = 4JJ=!
(,ec. &&5 in relation to ,ec. &(5 both
of the N6$! of %**')
Taxpayer: Prescripti(e Perio&$ !"aim for 8efun&
(199,)
; corporation *les its income tax return
on a calendar
year basis! Ior the *rst Duarter of 4JJ+ it
paid on +1 <ay
4JJ+ its Duarterly income tax in the
amount of &+!1
million! On :1 ;ugust 4JJ+ it paid the
second Duarterly income tax of &1!,
million! "he third Duarter resulted in a net
loss and no tax was paid! Ior the fourth
and *nal return for 4JJ+ the company
reported a net loss for the year and the
taxpayer indicated in the income tax return
that it opted to claim a refund of the
Duarterly income tax payments! On 41
Manuary 4JJ0 the corporation *led with
the Aureau of Internal >evenue a written
claim for the refund of &+!, million!
AI> failed to act on the claim for refundC
hence on 1:
<arch 4JJH the corporation *led a
petition for review
with the (ourt of "ax ;ppeals on its claim
for refund of the overpayment of its 4JJ+
Duarterly income tax! AI> in its answer to
the petition alleged that the claim for
refund was *led beyond the reglementary
period! 'id the claim for refund prescribe?
SUGGESTED
ANSWER)
"he claim for refund has prescribed! "he
counting of the t,o=1ea (e)c!(t!ve
(e!od 2o F*!+" a c*a!6 2o e20+d
is counted not from the date when the
Duarterly income taxes were paid but on
the date when the *nal ad2ustment return
or annual income tax return was *led (CIR
v. TMX Sa*e) I+c.# G.R. No. 58&8-#
>a+0a1 $4# $%%3A CIR v. P<!NA6 L!2e
I+)0a+ce Co.# I+c.# G.R. No. $/43/5# Ma1
3%# $%%4)! It is obvious that the annual
income tax return was *led before
Manuary 41 4JJ0 because the written
claim for refund was *led with the AI> on
Manuary
41 4JJ0! /ince the two%year prescriptive
period is not only a limitation of action in
the administrative stage but also a
limitation of action for bringing the case to
the 2udicial stage the petition for review
*led with the ("; on <arch 1: 4JJH is
beyond the reglementary period!
Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (199*)
@(35 (orporation *led its Duarterly
income tax return for the first Duarter of
4J=, and paid an income tax of
&,11!111!11 on <ay 4, 4J=,! In the
subseDuent Duarters @(35 suFered losses
so that on ;pril 4, 4J=H it declared a net
loss of &4111111!11 in its annual income
tax return! ;fter failing to get a refund
@(35 *led on <arch 4 4J== a case with
the (ourt of "ax ;ppeals to recover the
&,11!111!11 in taxes paid on <ay 4, 4J=,!
Is the action to recover the taxes
*led timely?
SUGGESTED ANSWER)
"he action for refund was *led in the (ourt
of "ax ;ppeals on time! In the case of
Co66!))!o+e v. TMX Sa*e)# I+c.# 3/4
SCRA $5. which is similar to this case the
/upreme (ourt ruled that in the case of
overpaid Duarterly corporate income tax
the two%year period for *ling claims for
refund in the AI> as well as in the
institution of an action for refund in the
("; the two%year prescriptive period for
tax refunds (/ec! :+1 "ax (ode) is
counted from the *ling of the *nal
ad2ustment return under /ec!
HL of the "ax (ode and not from the
*ling of the
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
62 of 73
Duarterly return and payment of the
Duarterly tax! "he
("; action on <arch 4 4J== was clearly
within the reglementary two%year period
from the *ling of the *nal ad2ustment return
of the corporation on ;pril 4, 4J=H!
Taxpayer: Prescripti(e Perio&$ !"aims for 8efun& (2*)
On <arch 4: :114 >38 paid his taxes!
"en months later he reali$ed that he
had overpaid and so he immediately
filed a claim for refund with
the (ommissioner of Internal
>evenue!
On Iebruary :L :11+ he received the
decision of the (ommissioner denying
>38Bs claim for refund! On <arch :0
:11+ >38 *led an appeal with the (ourt
of "ax ;ppeals! Was his appeal *led on time
or not? >eason! (,-)
SUGGESTED ANSWER)
"he appeal was not *led on time! "he two%
year period of limitation for *ling a claim for
refund is not only a limitation for pursuing
the claim at the administrative level but also
a limitation for appealing the case to the
(ourt of "ax ;ppeals! "he law provides that
"no suit or proceeding shall be *led after
the expiration of two years from the date
of the payment of the tax or penalty
regardless of any supervening cause that
may arise after payment (/ection
::J M6K>(M! /ince the appeal was only
made on <arch
:0 :11+ more than two years had already
elapsed from
the time the taxes were paid on <arch 4:
:11+! ;ccordingly >38 had lost his 2udicial
remedy because of prescription!
Taxpayer: Protest against Assessment (199=)
(IA (orporation a domestic corporation
engaged in
food processing and other allied activities
received a letter
from the AI> assessing it for delinDuency
income taxes! (IA *led a letter of protest!
One month after a warrant of distraint and
levy was served on (IA (orporation! If you
were the lawyer engaged by (IA
(orporation to contest the assessment made
by the AI> what steps will you ta#e to
protect your client? (,-)
SUGGESTED ANSWER)
I shall immediately *le a motion for
reconsideration of the issuance of the
warrant of distraint and levy and see# from
the AI> (ommissioner a denial of the
protest "in clear and uneDuivocal
language!" "his is so because the issuance
of a warrant of distraint and levy is not
considered as a denial by the AI> of the
protest *led by (IA (orporation (CIR v.
U+!o+ S<!((!+" Co(.# $54 SCRA 4.&)!
Within thirty (+1) days from receipt of such
denial "in clear and uneDuivocal language" I
shall then *le a petition for review with the
(ourt of "ax ;ppeals! ALTERNATIVE
ANS?ER:
Within thirty (+1) days from receipt of the
warrant of
distraint and levy I shall *le a petition for
review with the (ourt of "ax ;ppeals with an
application for issuance of a writ of
preliminary in2unction to en2oin the Aureau
of Internal >evenue from enforcing the
warrant!
"his is the action I shall ta#e because I shall
consider the issuance of the warrant as a *nal
decision of the (ommissioner of Internal
>evenue which could be the
sub2ect of appeal to the (ourt of
"ax ;ppeals
(Do7e) 0. F*oMo# $4 SCRA 3&5)! "he (";
may however
remand the case to the AI> and reDuire
the (ommissioner
to speci*cally rule on the protest! "he
decision of the (ommissioner if adverse to
my client would then constitute an
appealable decision!
Taxpayer: Protest against Assessment
(1999)
; (o! a &hilippine corporation received
an income tax
deficiency assessment from the AI> on
<ay , 4JJ,! On <ay +4 4JJ, ; (o!
*led its protest with the AI>! On Muly +1
4JJ, ; (o! submitted to the AI> all
relevant supporting documents! "he (I>
did not formally rule on the protest but on
Manuary :, 4JJH ; (o! was served a
summons and a copy of the complaint for
collection of the tax deficiency *led by the
AI> with the >egional "rial (ourt (>"()!
On Iebruary :1 4JJH ; (o! brought a
&etition for >eview before the (";! "he
AI> contended that the &etition is
premature since there was no formal
denial of the protest of ; (o! and should
therefore be dismissed!
4! ?as the ("; 2urisdiction
over the case?
SUGGESTED
ANSWER6
7es the ("; has 2urisdiction over the case
because this Duali*es as an appeal from
the (ommissionerBs decision on disputed
assessment! When the (ommissioner
decided to collect the tax assessed without
*rst deciding on the taxpayerBs protest the
effect of the (ommissionerSs action of
*ling a 2udicial action for collection is a
decision of denial of the protest in which
event the taxpayer may *le an appeal with
the (";! (Re(07*!c v. L!6 T!a+ Te+" C
So+)# I+c.# $- SCRA 45.A Da1!t v.
C0G# L=8%%$/# Se(t. 3-# $%55)!
:! ?as the >"( 2urisdiction over the
collection case *led by the AI>?
3xplain!
SUGGESTED
ANSWER6
"he >"( has no 2urisdiction over the
collection case *led by the AI>! "he *ling
of an appeal with the ("; has the eFect of
divesting the >"( of 2urisdiction over the
collection case! ;t the moment the
taxpayer appeals the case to the (ourt of
"ax ;ppeals in view of the (ommissionerBs
*ling of the collection case with the >"(
which was considered as a decision of
denial it gives a 2usti*able basis for the
taxpayer to move for dismissal in the >"(
of the .overnmentBs action to collect the tax
liability under dispute! (Da7e) v. F*oMo# $4
SCRA 3&5A Sa+ >0a+ v. Va)E0eG# 8 SCRA
%3)! "here is no *nal executory and
demandable assessment which can be
enforced by the AI> once a timely appeal is
*led!
Taxpayer: Protest against Assessment (1999)
; (o! a &hilippine corporation received an
income tax deficiency assessment from the
AI> on 8ovember :,
4JJH! On 'ecember 41 4JJH ; (o! *led its
protest with the AI> On <ay :1 4JJL the
AI> issued a warrant of distraint to enforce
the assessment! "his warrant was served on
; (o! on <ay :, 4JJL! In a letter dated
Mune 0
4JJL and received by ; (o! , days later the
(I> formally denied ; (o!Bs protest stating
that it constitutes his *nal decision on the
matter! On Muly H 4JJL ; (o! *led a &etition
for >eview with the (";! "he AI> moved
to
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
6* of 73
dismiss the &etition on the ground that the ("; has no
2urisdiction over the case!
'ecide! (41-)
SUGGESTED ANSWER)
"he ("; has 2urisdiction over the case! "he
appealable decision is the one which
categorically stated that the (ommissionerBs
action on the disputed assessment is *nal
and therefore the rec#oning of the +1%
day period to appeal was on Mune J 4JJJ!
"he *ling of the petition for review with
the ("; was timely made! "he /upreme
(ourt has ruled that the (I> must
categorically state that his action on a
disputed assessment is *nalC otherwise the
period to appeal will not commence to run!
"hat *nal action cannot be implied from the
mere issuance of a warrant "of distraint and
levy! (CIR v. U+!o+ S<!((!+"
Co(oat!o+# $54 SCRA 4.&)!
Taxpayer: Protest$ !"aim of 8efun& (1996)
Is protest at the time of payment of taxes
and duties a reDuirement to preserve the
taxpayersB right to claim a refund? 3xplain!
SUGGESTED ANSWER)
Ior TAXES imposed under the NIRC#
protest at the time of payment is not
reDuired to preserve the taxpayersB right to
claim refund! "his is clear under ,ection
&5( of the N6$! which provides that a suit
or proceeding maybe maintained for the
recovery of national internal revenue tax
or penalty alleged to have been
erroneously assessed or collected whether
such tax or penalty has been paid under
protest or not!
Ior DUTIES imposed under the Ta!22 a+d
C0)to6) Code a protest at the time of
payment is reDuired to preserve the
taxpayersB claim for refund! "he procedure
under the "(( is to the effect that when a
ruling or decision of the (ollector of
(ustoms is made whereby liability for duties
is determined the party adversely aFected
may protest such ruling or decision by
presenting to the (ollector at the time when
payment is made or within 4, days
thereafter a written protest setting forth
his ob2ections to the ruling or decision in
Duestion (/ec!
:+1=!
"(()!
Taxpayer$ Appea" to t#e !ourt of Tax Appea"s (29)
; taxpayer received a tax deficiency
assessment of &4!:
<illion from the AI> demanding payment
within 41 days otherwise it would collect
through summary remedies! "he taxpayer
reDuested for a reconsideration stating the
grounds therefor! Instead of resolving the
reDuest for reconsideration the AI> sent a
Iinal 8otice before /ei$ure to the taxpayer!
<ay this action of the (ommissioner of
Internal >evenue be deemed a denial of the
reDuest for reconsideration of the taxpayer to
entitle him to appeal to the (ourt of "ax
;ppeals? 'ecide with reasons! (,-)
SUGGESTED ANSWER)
7es the *nal notice before sei$ure was in
effect a denial of the taxpayerBs reDuest for
reconsideration not only was the notice the
only response received its nature content
and tenor supports the theory that it was
the AI>Bs *nal act regarding the reDuest
for reconsideration! (CIR v. I)a7e*a
C0*t0a* Co(oat!o+# G.R. No. $843$/#
>0*1 $$#
3//$
'
Taxpayer$ !"aim for Tax !re&its
(26)
(ongress enacts a law granting grade
school and high
school students a 41- discount on all
school%prescribed textboo#s purchased
from any boo#store! "he law allows
boo#stores to claim in full the discount as a
tax credit!
4! If in a taxable year a boo#store has
no tax due on
which to apply the tax credits can the
boo#store claim from the AI> a tax refund
in lieu of tax credit? 3xplain! (:!,-)
SUGGESTED
ANSWER)
8o the boo#store cannot claim from
the AI> a tax refund in lieu of tax
credit! "here is nothing in the law that
grants a refund when the boo#store has no
tax liabil% ity against which the tax credit
can be used (CIR v. Ce+ta* L0Go+ D0"#
G.R. No $4%-.&# A(!* $4# 3//4'! ; tax
credit is in the nature of a tax exemption
and in case of doubt the doubt should be
resolved in strictissimi 1uris against the
claimant!
:! (an the AI> reDuire the boo#stores
to deduct the amount of the discount from
their gross income? 3xplain! (:!,-)
SUGGESTED
ANSWER)
8o! "ax credit which reduces the tax
liability is diFerent from a tax deduction
which merely reduces the tax base! /ince
the law allowed the boo#stores to claim in
full the discount as a tax credit the AI> is
not allowed to expand or contract the
legislative mandate (CIR v. B!co*a+d!a
D0" Co(.# G.R. No. $.5/58# >0*1 3$#
3//-A CIR v. Ce+ta* L0Go+ D0" Co(.#
G.R. No. $4%-.&# A(!* $4# 3//4'.
+! If a boo#store closes its business due
to losses with% out being able to recoup the
discount can it claim reimbursement of
the discount from the government on the
ground that without such reimbursement
the law constitutes ta#ing of private
property for public use without 2ust
compensation? 3xplain! (,-)
SUGGESTED
ANSWER)
; boo#store closing its business due to
losses cannot claim reimbursement
of the discount from
the government! If the business
continues to operate at a loss and no other
taxes are due thus compelling it to close
shop the credit can never be applied and
will be lost altogether (CIR v. Ce+ta*
L0Go+ D0"# G.R. No. $4%-.&# A(!* $4#
3//4'. "he grant of the discount to the
taxpayer is a mere privilege and can be
revo#ed anytime!
Taxpayer$ !ompromise after !rimina" Action (199=)
;n information was *led in court for willful
non%payment
of income tax the assessment of which has
become *nal! "he accused through counsel
presented a motion that he be allowed to
compromise his tax liability sub2ect of the
information! "he prosecutor indicated his
conformity to the motion! Is this procedure
correct? Q,-R
SUGGESTED ANSWER)
8o! (riminal violations if already *led in
court may not be compromised (,ec.
&("A3@ N6$!). Iurthermore the payment of
the tax due after apprehension shall not
constitute a valid defense in any prosecution
for violation of any provisions of the "ax
(ode (,ec. &"'(a) N6$!). Iinally there is
no showing that the prosecutor in the
problem is a legal oFicer of the
Aureau of Internal
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
64 of 73
>evenue to whom the conduct of criminal
actions are
lodged by the "ax
(ode!
A+TERNATI1E ANSWER)
8o! If the compromise referred to is the civil
aspect the procedure followed is not
correct! (ompromise for the payment of any
internal revenue tax shall be made only by
the (ommissioner of Internal >evenue or in
a proper case the 3valuation Aoard of the
AI> (/ec! :10 8I>()! ;pplying the law
to the case at bar compromise
settlement can only be effected by leave of
(ourt!
Taxpayer$ Protest against Assessment$ 'onor6s Tax
(1999)
<r! >odrigo an =1%year old retired
businessman fell in
love with :1%year old "etchie /onora a night
club hospitality girl! ;lthough she refused to
marry him she agreed to be his "live%in"
partner! In gratitude <r! >odrigo
transferred to her a condominium unit
where they both live under a deed of sale
for &41 <illion! <r! >odrigo paid the capital
gains tax of ,- of &41 <illion!
"he (ommissioner of Internal >evenue
found that the property was transferred to
"etchie /onora by <r! >odrigo because of
the companionship she was providing him!
;ccordinglythe (ommissioner
made a determination that
/onora had compensation income of &41
<illion in the year the condominium unit
was transferred to her and issued a
de*ciency income tax assessment!
"etchie /onora protests the assessment
and claims that the transfer of the
condominium unit was a gift and therefore
excluded from income! ?ow will you rule on
the protest of "etchie /onora? 3xplain!
SUGGESTED ANSWER)
I will grant the protest and cancel the
assessment! "he transfer of the property
by <r! >odrigo to <s! /onora was
gratuitous! "he deed of sale indicating a &41
million consideration was simulated because
<r! >odrigo did not receive anything from
the sale! "he problem categorically states
that the transfer was made in gratitude to
<s! /onoraBs companionship! "he transfer
being gratuitous is sub2ect to donorBs tax!
<r! >odrigo should be assessed deficiency
donorBs tax and a ,1- surcharge imposed
for fraudulently simulating a contract of sale
to evade donorBs tax! (,ec. *%(b) N6$!).
Taxpayer$ -it##o"&ing Agent$ !"aim of Tax 8efun& (29)
'oes a withholding agent have the right to
*le an application for tax refund? 3xplain!
SUGGESTED ANSWER)
7es! ; taxpayer is "any person sub2ect to tax!"
/ince the withholding tax agent who is
"reDuired to deduct and withheld any tax" is
made "personally liable for such tax" should
the amount of the tax withheld be *nally
found to be less than that reDuired to be
withheld by law then he is a taxpayer! "hus
he has suFicient legal interest to *le an
application for refund of the amount he
believes was illegally collected from him!
(Co66!))!o+e o2 I+te+a* Reve+0e v.
Pocte C Ga67*e# G.R. No. --585#
Dece67e
3#
$%%$'
+OCA+ - REA+
PROPERTY
TAXE
S
/oca" Taxation: Actua" <se of Property
(22)
"he real property of <r! and <rs
;ngeles situated in a
commercial area in front of the public
mar#et was
declared in their "ax 'eclaration as
residential because it had been used by
them as their family residence from the
time of its construction in 4JJ1! ?owever
since Manuary
4JJL when the spouses left for the
Enited /tates to stay
there permanently with their children the
property has been rented to a single
proprietor engaged in the sale of
appliances and agri%products! "he
&rovincial ;ssessor reclassified the
property as commercial for tax purposes
starting Manuary 4JJ=! <r! and <rs!
;ngeles appealed to the 5ocal Aoard of
;ssessment ;ppeals contending that the
"ax 'eclaration previously classifying
their property as residential is binding!
?ow should the appeal be decided? (,-)
SUGGESTED
ANSWER)
"he appeal should be decided against <r!
and <rs! ;ngeles! "he law focuses on the
actual use of the property for classification
valuation and assessment purposes
regardless of ownership! /ection :4L of the
5ocal .overnment (ode provides that "real
property shall be classified valued and
assessed on the basis of its actual use
regardless of where located whoever owns
it and whoever uses it"!
/oca" Taxation: !o(erage
(22)
;side from the basic real estate tax give
three (+) other
taxes which may be imposed by provincial
and city governments as well as by
municipalities in the <etro <anila area!
(+-)
SUGGESTED
ANSWER)
"he following real property taxes aside
from the basic real property tax may be
imposed by provincial and city
governments as well as by
municipalities in the <etro <anila area:
4! ;dditional levy on real property for
the /pecial
3ducation Iund (/ec! :+, 5.()C
:! ;dditional ;d%valorem tax on Idle
lands (/ec! :+X 5.()C and
+! /pecial levy
(/ec! :01)!
QNote: "he Duestion is susceptible to dual
interpretation because it is as#ing for three
other taxes and not three other real
property taxes! ;ccordingly an alternative
answer should be considered and given full
creditR
;! "he following taxes aside from basic
real estate tax may be imposed by:
4! &rovincial
.overnment
a! &rinterBs or publisherBs tax
b! Iranchise "ax
c! &rofessional tax
:! (ity .overnment % may levy taxes which
the province or municipality are authori$ed
to levy (/ec! 4,4 5.()
a! &rinterBs or
publisherBs tax b!
Iranchise tax
c! &rofessional tax
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
6. of 73
+! <unicipalities in the <etro <anila
;rea % may levy
taxes at rates which shall not exceed by
,1- the maximum rates prescribed in
the 5ocal .overnment (ode!
a! ;nnual *xed tax on
manufacturers assemblers
repac#ers processors brewers
distillers recti*ers and compounders of
liDuors distilled spirits and wines or
manufacture of any article of commerce
of whatever #ind or natureC
b! ;nnual *xed tax on wholesalers
distributors or dealers in any article of
commerce of whatever #ind or natureC
c! &ercentage tax on retailers
Q8ote: Other taxes may comprise the
enumeration because many other taxes are
authori$ed to be imposed by 5.Es!R
/oca" Taxation: 2xemption$ 8ea" Property Taxes (22)
Ender the 5ocal .overnment (ode what
properties are exempt from real property
taxes? (,-)
SUGGESTED ANSWER)
"he following properties are exempt from
real property taxes: (/ec! :+0 5.()!
4! >eal property owned by the
>epublic of the
&hilippines or any of its political
subdivisions except when the bene*cial
use thereof has been granted for
consideration or otherwise to a taxable
personC
:! ;ll lands buildings and
improvements actually directly and
exclusively used for religious charitable
or educational purposes by charitable
institutions churches parsonages or
convents appurtenant thereto mosDues
nonpro*t or religious cemeteriesC
+! ;ll machineries and eDuipment that
are actually directly and exclusively
used by local water districts and
government%owned or controlled
corporations engaged in the supply and
distribution of water andOor generation
and transmission of electric powerC
0! ;ll real property owned by duly
registered cooperatives as provided
for under >!;! 8o! HJ+=C and
,! <achinery and eDuipment used for
pollution control and environmental
protection!
/oca" Taxation: Imposition of A& Ca"orem Tax (2)
<ay local governments impose an annual
realty tax in
addition to the basic real property tax on
idle or vacant
lots located in residential subdivisions
within their respective territorial
2urisdictions? (+-)
SUGGESTED ANSWER)
8ot all local government units may do so!
Only provinces cities and municipalities
within the <etro <anila area (,ec.
&5& ?ocal #overnment !ode) may impose
an ad va*oe6
ta@ not exceeding *ve percent (,-) of the
assessed value
(,ec. &5. 6bid.) of idle or vacant
residential lots in a
subdivision duly approved by
proper authorities
regardless of area! (,ec.&5' 6bid.)
/oca" Taxation: /ega"ityE !onstitutiona"ity$
Tax
%r&inance
(24)
@ a taxpayer who believes that an
ordinance passed by
the (ity (ouncil of &asay is
unconstitutional for being
discriminatory against him want to #now
from you his tax lawyer whether or not he
can *le an appeal! In the aFirmative he
as#s you where such appeal should be
made: the /ecretary of Iinance or the
/ecretary of Mustice or the (ourt of "ax
;ppeals or the regular courts! What would
your advice be to your client @? (=-)
SUGGESTED
ANSWER)
"he appeal should be made with the
/ecretary of Mustice! ;ny Duestion on the
constitutionality or legality of a tax
ordinance may be raised on appeal with
the /ecretary of Mustice within +1 days
from the effectivity thereof! (Sec.
$5&# LGCA Ha"o+o1 MaBet Ve+do
A))oc!at!o+ v.
M0+!c!(a*!t1 o2 Ha"o+o1# 8&-
SCRA 8&- 93//3:'!
/oca" Taxation: /ega"ity$ Imposition of 8ea" Property
Tax
8ate
(22)
;n Ordinance was passed by the
&rovincial Aoard of a
&rovince in the 8orth increasing the
rate of basic real
property tax from 1!11H- to 4 - of the
assessed value of the real property
eFective Manuary 4 :111! >esidents of
the municipalities of the said province
protested the Ordinance on the ground
that no public hearing was conducted and
therefore any increase in the rate of real
property tax is void! Is there merit in the
protest? 3xplain your answer! (:-)
SUGGESTED
ANSWER)
"he protest is devoid of merit! 8o public
hearing is reDuired before the enactment
of a local tax ordinance levying the basic
real property tax (;rt! +:0 5.(
>egulations)!
A+TERNATI1E
ANSWER)
7es there is merit in the protest provided
that suFicient proof could be introduced
for the non%observance of public hearing!
Ay implication the /upreme (ourt
recogni$ed that public hearings are
reDuired to be conducted prior to the
enactment of an ordinance imposing real
property taxes! ;lthough it was concluded
by the highest tribunal that presumption
of validity of a tax ordinance can not be
overcome by bare assertions of procedural
defects on its enactment it would seem that
if the taxpayer had presented evidence to
support the allegation that no public hearing
was conducted the (ourt should have ruled
that the tax ordinance is invalid! (Be*e+
F!"0ee) v. Co0t o2 A((ea*)# GRNo.
$$%$&3# Mac<
34#
$%%%'!
/oca" Taxation: Po1er to Impose (24)
In order to raise revenue for the repair
and maintenance of the newly constructed
(ity ?all of <a#ati the (ity <ayor ordered
the collection of &4!11 called "elevator tax"
every time a person rides any of the high%
tech elevators in the city hall during the
hours of =:11 a!m! to
41:11 a!m! and 0:11 p!m! to H:11 p!m! Is the
"elevator tax"
a valid imposition?
3xplain! (=-)
SUGGESTED ANSWER)
8o! "he imposition of a tax fee or charge or
the generation of revenue under the 5ocal
.overnment (ode shall be exercised by the
/;8.E8I;8 of the local government unit
concerned through an appropriate
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
66 of 73
ordinance (,ection %5& of the ?ocal
#overnment !ode). "he city
mayor alone could not order the collection
of the taxC as such the "elevator tax" is an
invalid imposition!
/oca" Taxation: 8emissionE!on&onation of Taxes (2*)
>( is a law%abiding citi$en who pays his
real estate taxes promptly! 'ue to a
series of typhoons and adverse economic
conditions an ordinance is passed by <<
(ity granting a ,1- discount for payment of
unpaid real estate taxes for the preceding
year and the condonation of all penalties
on *nes resulting from the late
payment! ;rguing that the ordinance
rewards delinDuent taxpayers and
discriminates against prompt ones >(
demands that he be refunded an amount
eDuivalent to one%half of the real taxes he
paid! "he municipal attorney rendered an
opinion that >( cannot be reimbursed
because the ordinance did not provide for
such reimbursement! >( *les suit to
declare the ordinance void on the ground
that it is a class legislation! Will his suit
prosper? 3xplain your answer brie)y! (,-)
SUGGESTED ANSWER)
"he suit will not prosper! "he remission or
condonation of taxes due and payable to the
exclusion of taxes already collected does not
constitute unfair discrimination! 3ach set of
taxes is a class by itself and the law would
be open to attac# as class legislation only if
all taxpayers belonging to one class were
not treated ali#e (>0a+ L0+a S07d!v!)!o+#
I+c.# v. Sa6!e+to# %$ P<!*. 8&$ 9$%43:'.
/oca" Taxation: 8u"e of <niformity an& 23ua"ity (24)
"he (ity of <a#ati in order to solve the
traFic problem
in its business districts decided to impose a
tax to be paid by the driver on all private
cars entering the city during pea# hours
from =:11 a!m! to J:11 a!m! from <ondays
to Iridays but exempts those cars carrying
more than two occupants excluding the
driver! Is the ordinance valid? 3xplain! (=-)
SUGGESTED ANSWER)
"he ordinance is in violation of the >ule of
Eniformity and 3Duality which reDuires that
all sub2ects or ob2ects of taxation similarly
situated must be treated ali#e in eDual
footing and must not classify the sub2ects in
an arbitrary manner! In the case at bar the
ordinance exempts cars carrying more than
two occupants from coverage of the said
ordinance! Iurthermore the ordinance only
imposes the tax on private cars and exempts
public vehicles from the imposition of the
tax although both contribute to the traFic
problem! "here exists no substantial
standard used in the classi*cation by the
(ity of <a#ati!
;nother issue is the fact that the tax is
imposed on the driver of the vehicle and not
on the registered owner of the same! "he tax
does not only violate the reDuirement of
uniformity but the same is also un2ust
because it places the burden on someone
who has no control over the route of the
vehicle! "he ordinance is therefore invalid
for violating the rule of uniformity and
eDuality as well as for being un2ust!
/oca" Taxation$ Situs of Professiona" Taxes (29)
<r! Iermin a resident of Nue$on (ity is
a (ertified
&ublic ;ccountant%5awyer engaged in the
practice of his
two professions! ?e has his
main oFice in
<a#ati (ity and maintains a branch oFice
in &asig (ity! <r! Iermin pays his
professional tax as a (&; in <a#ati (ity
and his professional tax as a lawyer in
&asig (ity! (,-)
a) <ay <a#ati (ity where he has his
main oFice reDuire him to pay his
professional tax as a lawyer? 3xplain!
SUGGESTED ANSWER)
8o! <a#ati (ity where <r! Iermin has
his main oFice may not reDuire him to
pay his professional tax as a lawyer! <r!
Iermin has the option of paying his
professional tax as a lawyer in &asig
(ity where he practices law or in <a#ati
(ity where he maintains his principal
oFice! (,ec. %5*Ab@ ?ocal #overnment
!ode)
b) <ay Nue$on (ity where he has his
residence and where he also practices his
two professions go after him for the
payment of his professional tax as a (&;
and a lawyer? 3xplain!
SUGGESTED
ANSWER)
8o the situs of the professional tax is the
city where the professional practices his
profession or where he maintains his
principal oFice in case he practices his
profession in several places! "he local
government of Nue$on (ity has no right to
collect the professional tax from <r!
Iermin as the place of residence of the
taxpayer is not the proper situs in the
collection of the professional tax!
/oca" Taxation$ Specia" /e(y on I&"e /an&s
(29)
; city outside of <etro <anila plans
to enact an
ordinance that will impose a special levy
on idle lands
located in residential subdivisions within
its territorial 2urisdiction in addition to the
basic real property tax! If the lot owners of
a subdivision located in the said city see#
your legal advice on the matter what
would your advice be? 'iscuss! (,-)
SUGGESTED
ANSWER)
I would advise the lot owners that a city
even if it is outside <etro <anila may levy
an annual tax on idle lands at the rate not
exceeding *ve percent (,-) of the
assessed value of the property which
shall be in addition to the basic real
property tax! (,ec. &5. ?ocal #overnment
!ode) I would li#ewise advise them that
the levy may apply to residential lots
regardless of land area in subdivisions
duly approved by proper authorities the
ownership of which has been transferred to
individual owners who shall be liable for the
additional tax! (5ast par! /ec! :+L)
"he term "Idle 5ands" means land not
devoted directly to any crop or to any
de*nite purpose for at least one year prior
to the notice of expropriation except for
reasons other than force ma1eure or any
fortuitous event but used to be devoted or
is suitable to such crop or is contiguous to
land devoted directly to any crop and
does not include land devoted permanently
or regularly to other essential and more
productive purpose. (9hilippine ?egal
4ncyclopedia by ,ibal %*/. 4d.)
Iinally I would advise them to construct or
place improvements on their idle lands by
ma#ing valuable additions to the property
or ameliorations in the landBs
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
62 of 73
conditions so the lands would not be considered as idle!
(/ec! 4JJQmR) In this manner their
properties would not be sub2ect to the ad
valorem tax on idle lands!
8ea" Property Tax: <n&ergroun& 5aso"ine TanBs (24)
Ender ;rticle 04, of the (ivil (ode
in order for machinery and eDuipment to
be considered real property the pieces
must be placed by the owner of the land
and in addition must tend to directly
meet the needs of the industry or wor#s
carried on by the owner! Oil companies
install underground tan#s in the gasoline
stations located on land leased by the oil
companies from the owners of the land
where the gasoline stations QareR located!
;re those underground tan#s which were
not placed there by the owner of the land
but which were instead placed there by the
lessee of the land considered real
property for purposes of real property
taxation under the local .overnment
(ode? 3xplain! (=-)
SUGGESTED ANSWER)
7es! "he properties are considered as
necessary fixtures of the gasoline station
without which the gasoline station would be
useless! <achinery and eDuipment
installed by the
lessee of leased land is not real property for
purposes of execution of a *nal 2udgment
only! "hey are considered as real property
for real property tax purposes as "other
improvements to aFixed or attached real
property under the ;ssessment 5aw and the
>eal &roperty "ax (ode! (Ca*te@ v. Ce+ta*
Boad o2 A))e))6e+t A((ea*)# $$. SCRA
3%-
9$%53:'.
8ea" Property Tax$ 8e3uirements$ Auction Sa"es of
Property for Tax 'e"in3uency (26)
Nue$on (ity published on Manuary +1 :11H
a list of delinDuent real property taxpayers
in : newspapers of general circulation and
posted this in the main lobby of the (ity
?all! "he notice reDuires all owners of real
properties in the list to pay the real
property tax due within +1 days from the
date of publication otherwise the properties
listed shall be sold at public auction!
Moachin is one of those named in the list! ?e
purchased a real property in 4JJH but
failed to register the document of sale with
the register of 'eeds and secure a new real
property tax declaration in his name! ?e
alleged that the auction sale of his property
is void for lac# of due process considering
that the (ity "reasurer did not send him
personal notice! Ior his part the (ity
"reasurer maintains that the publication
and posting of notice are suFicient
compliance with the reDuirements of the law!
4! If you were the 2udge how will you
resolve this
issue?
(:!,-)
SUGGESTED ANSWER)
I will resolve the issue in favor of Moachin! In
auction sales of property for tax delinDuency
notice to delinDuent landowners and to the
public in general is an essential and
indispensable reDuirement of law the non%
ful*llment of which vitiates the same
(T!o+"co v. P<!*. Vetea+) Ba+B# G.R. No.
53&53# A0". 4# $%%3'. "he failure to give
notice to the right person i!e! the real owner
will render an auction sale void (Ta+ v.
Ba+te"0!# G.R. No# $4./3&# Octo7e 3.#
3//4A C!t1 Tea)0e o2 K.C. v. CA# G.R. No.
$3/%&.# Dec.
33#
$%%&'.
:! ;ssuming Moachin is a registered
owner will your answer be the same?
(:!,-)
SUGGESTED
ANSWER)
7es! "he law reDuires that a notice of
the auction sale must be properly sent to
Moachin and not merely through publication
(Ta+ v. Ba+te"0!# G.R. No# $4./3&#
Octo7e
3.#3//4A E)tate o2 Mecede) >aco7 v. CA#
G.R. No. $3/.84# Dec. 33# $%%&'.
8ea" Property Taxation: !apita" Asset (s) %r&inary
Asset
(199
9)
In 4JJ1 <r! 8aval bought a lot for
&4111111!11 In a
subdivision with the intention of building
his residence on it! In 4JJ0 he abandoned
his plan to build his residence on it
because the surrounding area became a
depressed area and land values in the
subdivision went downC instead he sold it
for &=11!111!11! ;t the time of the sale
the $onal value was &,11!111!11!
4) Is the land a capital asset or an
ordinary asset? 3xplain!
:) Is there any income tax due on the
sale? 3xplain!
SUGGESTED
ANSWERS)
4) "he land is a capital asset because it is
neither for sale in the ordinary course of
business nor a property used in the trade
or business of the taxpayer! (/ec! ++!
8I>()!
:) 7es <r! 8aval is liable to the ,-
capital gains tax imposed under /ection
:4(e) of the "ax (ode based on the gross
selling price of &=11!111!11 which is an
amount higher than the $onal value!
8ea" Property Taxation: !apita" 5ains (s) %r&inary
5ains
(199
=)
What is the difference between capital
gains and ordinary
gains?
Q+-R
SUGGESTED
ANSWER)
(;&I";5 .;I8/ are gains reali$ed from
the sale or exchange of capital assets
while O>'I8;>7 .;I8/ refer to gains
reali$ed from the sale or disposition of
ordinary assets!
8ea" Property Taxation: !o(erage of %r&inary
Income
(199
=)
What does the term "ordinary income"
include? Q:-R
SUGGESTED ANSWER)
"he term ordinary income includes any gain
from the sale or exchange of property which
is not a capital asset! "hese are the gains
derived from the sale or exchange of
property such as stoc# in trade of the
taxpayer or other property of a #ind which
would properly be included in the inventory
of the taxpayer if on hand at the close of the
taxable year or property held by the
taxpayer primarily for sale to customers in
the course of his trade or business or
property used in trade or business of a
character which is sub2ect to the allowance
for depreciation or real property used in
trade or business of the taxpayer! (,ec. &&
AN@ in relation to ,ec. 5*AA@(%) both of the
N6$!).
A+TERNATI1E ANSWER)
"he term ordinary income includes income
from performance of services whether
professional or per% sonal gains accruing
from business and pro*t arising from the
sale or exchange of ordinary assets!
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
64 of 73
8ea" Property Taxation: 2xc#ange of /ot$ !apita" 5ain
Tax (199,)
; corporation engaged in real estateB
development
executed deeds of sale on various
subdivided lots! One
buyer after going around the subdivision
bought a corner lot with a good view of the
surrounding terrain! ?e paid &4!: million
and the title to the property was issued! ;
year later the value of the lot
appreciated to a mar#et value of &4!H
million and the buyer decided to build his
house thereon! Epon inspection however
he discovered that a huge tower antennae
had been erected on the lot frontage totally
bloc#ing his view! When he complained the
realty company exchanged his lot with
another corner lot with an eDual area but
aFording a better view! Is the buyer liable
for capital gains tax on the exchange of the
lots?
SUGGESTED ANSWER)
7es the buyer is sub2ect to capital gains tax
on the exchange of lots on the basis of
prevailing fair mar#et value of the property
transferred at the time of the exchange or
the fair mar#et value of the property
received whichever is higher (,ection
&%(e) N6$!). >eal property transactions
sub2ect to capital gains tax are not limited to
sales but also exchanges of property unless
exempted by a specific provision of law!
A+TERNATI1E ANSWER)
8o! "he exchange is not sub2ect to
capital gains tax because it is merely done
to comply with the intentions of the parties
to the previous contract regarding the sale
and acDuisition of a property with a
good view! "his is a simple substitution of
the ob2ect of sale and since the previous
transaction was already sub2ected to tax no
new tax should be imposed on the
exchange (36$ $uling No.
&%(e) (-5-/*
((/-*-).
8ea" Property Taxation: 2xemptionE'e&uctions$ 'onor6s
Tax (199=)
;ce "obacco (orporation bought a parcel of
land situated at &ateros and donated it to
the <unicipal .overnment of &ateros for the
sole purpose of devoting the said land as a
relocation site for the less fortunate
constituents of said municipality! In
accordance therewith the <unicipal .ov%
ernment of &ateros issued to the
occupantsObeneficiaries (erti*cates of
;ward giving to them the respective areas
where their houses are erected! "hrough
Ordinance 8o! : /eries of 4JJ= the said
municipal government ordained that the
lots awarded to the awardeesOdonees be
*nally transferred and donated to them!
'etermine the tax conseDuence of the
foregoing dispositions with respect to ;ce
"obacco (orporation the <unicipal
.overnment of &ateros and the
occupantsObene*ciaries! Q,-R SUGGESTED
ANSWER)
"he donation by ;ce "obacco (orporation is
e@e6(t 2o6 t<e do+oO) ta@ because it
Duali*es as a gift to or
for the use of any political subdivision of the
8ational .overnment (/ection 414(:) 8I>()!
"he conveyance is li#ewise exempt from
documentary stamp tax because it is a
transfer without consideration!
/ince the donation is to be used as a
relocation site for the less fortunate
constituents of the municipality! It may be
considered as an underta#ing for human
settlements
hence the value of the land 6a1
7e ded0ct!7*e
!+ 20** 2o6 t<e "o)) !+co6e of
;ce "obacco
(orporation if in accordance to a
8ational &riority &lan
determined by the 8ational 3conomic
'evelopment ;uthority! (,ec. 5"L=@(&)(a)
N6$!). If the utili$ation is not in
accordance to a 8ational &riority &lan
determined by the 8ational 3conomic
'evelopment ;uthority then ;ce "obacco
(orporation may deduct the value of the
land donated only to the extent of *ve (,-)
percent of its taxable income derived
from trade or business as computed
without the bene*t of the donation!
(,ec.
5"A=@(&)(a) in relation to ,ec.
5"A=@(%) N6$!).
"he <unicipality of &ateros is not sub2ect
to any donorBs tax on the value of land it
subseDuently donated it being exempt
from taxes as a political subdivision of
the 8ational .overnment!
"he occupantsObene*ciaries are sub2ect to
real property taxes because they now own
the land!
A+TERNATI1E ANSWER on Taxability of
8unicipality and
Awar
dees:
"he awarding by the <unicipal
.overnment of lots to
specific awardees or donees is li#ewise
exempt from the donorBs tax because it is
only an implementation of the purpose for
which the property was given by ;ce
"obacco (orporation! "he purpose of the
*rst donation is to devote the land as a
relocation site for the less fortunate
constituents! If later on the <unicipality
gives out (ertificates of ;ward over
speci*c lots occupied by the Dualified
occupantsObene*ciaries this is intended to
perpetuate the purpose of the previous
donor the <u% nicipality acting merely as
a conduit and not the true donor! "his is
simply a donation by the <unicipality in
form but not in substance!
"he receipt by the occupant
bene*ciaries of their respective lots
through the (ertificate of ;ward has no
tax implications! "hey are however liable
for real prop% erty taxes!
8ea" Property Taxation: 2xemption: Ac3uiring
7e1
Principa" 8esi&ence
(2)
5ast Muly 4: :111 <r! Y <rs! &eter
(amacho sold their
principal residence situated in "andang
/ora Nue$on (ity for "en <illion &esos
(&41111111!11) with the intention of using
the proceeds to acDuire or construct a new
principal residence in ;urora ?ills Aaguio
(ity! What conditions must be met in order
that the capital gains presumed to have
been reali$ed from such sale may not be
sub2ect to capital gains tax? (,-)
SUGGESTED ANSWER)
"he conditions
are:
4! "he proceeds are fully utili$ed in
acDuiring or
constructing a new principal
residence within eighteen (4=) calendar
months from the sale or disposition of
the principal residence or eighteen (4=)
months from Muly 4: :111!
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
69 of 73
:! "he historical cost or ad2usted basis
of the real
property sold or disposed shall be
carried over to the new principal
residence built or acDuired!
+! "he (ommissioner of Internal >evenue
must have been informed by <r! Y <rs!
&eter (amacho within thirty (+1) days
from the date of sale or disposition on
Muly 4: :111 through a prescribed
return of their intention to avail of the
tax exemption!
0! "hat the said exemption can only be
availed of once every ten (41) years!
,! If there is no full utili$ation of the
proceeds of sale or disposition the
portion of the gain presumed to have
been reali$ed from the sale or
disposition shall be sub2ect to capital
gains tax A,ec. &" (B) (&) N6$! of
%**'@
8ea" Property Taxation: Fun&amenta" Princip"es (199,)
/tate the fundamental principles
underlying real property taxation in the
&hilippines!
SUGGESTED ANSWER)
"he following are the fundamental
principles governing real property taxation:
4) >eal property shall be appraised at its
current and fair mar#et valueC
:) >eal property shall be classi*ed for
assessment purposes on the basis of its
actual use:
+) >eal property shall be assessed on
the basis of a uniform classification
within each local government unitC
0) "he appraisal assessment levy and
collection of
real property tax shall not be let to
any private personC and
,) "he appraisal and assessment of real
property shall be eDuitable!
8ea" Property Taxation: Princip"es ; /imitations: /5<
(2)
.ive at least two (:) fundamental principles
governing real
property taxation which are limitations
on the taxing
power of local governments insofar as the
levying of the realty tax is concerned! (:-)
SUGGESTED ANSWER)
"wo (:) fundamental principles governing
real property taxation are:
4) "he appraisal must be at the current
and fair mar#et valueC and
:) (lassi*cation for assessment must be
on the basis of actual use! (,ec. %*/
?ocal #overnment !ode)
A+TERNATI1E ANSWER)
"he examinee should be given credit if he
chooses the above two (:) or any two (:) of
those enumerated below:
4) ;ssessment must be on the basis
of uniform
classificationC
:) ;ppraisal assessment levy and
collection shall not be
let to private personsC and
+) ;ppraisal and assessment must be
eDuitable! (,ec. %*/
?ocal #overnment !ode)
8ea" Property Taxation: Property So"& is
an
%r&inary Asset
(199=)
;n individual taxpayer who owns a ten
(41) door apart%
ment with a monthly rental of &41111
each residential
unit sold this property to another
individual taxpayer! Is the seller liable to
pay the capital gains tax? Q,-R SUGGESTED
ANSWER)
8o! "he seller is not liable to pay the
capital gains tax because the property sold
is an ordinary asset i!e! real property used
in trade or business! It is apparent that the
taxpayer is engaged in the real estate
business regularly renting out the ten (41)
door apartment!
8ea" Property Taxation: <n&ergroun& 5aso"ine
TanBs
(2
1)
Ender ;rticle 04, of the (ivil (ode
in order for
machinery and eDuipment to be
considered real property
they must be placed by the owner of the
land and in addition must tend to directly
meet the needs of the industry or wor#s
carried on by the owner! Oil companies
such as (altex and /hell install
underground tan#s in the gasoline stations
located on land leased by the oil companies
from others! ;re those underground tan#s
which were not placed there by the owner
of the land but which were instead placed
there by the lessee of the land considered
real property for purposes of real property
taxation under the 5ocal .overnment
(ode? 3xplain your answer! (,-)
SUGGESTED
ANSWER)
7es! "he underground tan#s although
installed by the lessee /hell and (altex
are considered as real property for
purposes of the imposition of real
property taxes! It is only for purposes of
executing a *nal 2udgment that these
machinery and eDuipment installed by the
lessee on a leased land would not be
considered as real property! Aut in the
imposition of the real property tax
the underground tan#s are taxable as
necessary fixtures of the gasoline station
without which the gasoline station would
not be operational! (Ca*te@ P<!*).# I+c
v. CBAA# $$.
SCRA.
3%-)!
8ea" Property Taxation$ 2xempte& Properties
(26)
What properties are exempt from the
real property tax?
(,-
)
SUGGESTED ANSWER)
"he following properties are exempt
from the real property tax (/ection :+0
5ocal .overnment (ode):
(4) >eal property owned by the
>3&EA5I( OI "?3
&?I5I&&I83/ or any of its political
subdivisions except when the bene*cial
use thereof has been granted for
consideration or otherwise to a taxable
personC
(:) (?;>I";A53
I8/"I"E"IO8/ churches
parsonages or convents
appurtenant thereto
mosDues non%pro*t or religious
cemeteries and all lands buildings and
improvements actually directly and
exclusively used for religious charitable
or educational purposesC
(+) ;ll machineries and eDuipment that
are actually directly and exclusively
used by 5O(;5 W;"3> E"I5I"I3/ and
government%owned or controlled
corporations engaged in the supply and
distribution
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
20 of 73
of water andOor generation and
transmission of
electric powerC
(0) ;ll real property owned by duly
>3.I/"3>3'
(OO&3>;"I63/ as provided for under
>!;! HJ+=C
and
(-) <achinery and eDuipment used for
9C??FT6CN !CNT$C? and
4N26$CN84NTA?
9$CT4!T6CN.
TARI33 AND CUSTOMS DUTIES
!ustoms: IF"exi+"e Tariff !"auseG (21)
What do you understand by the term
"flexible tariff clause" as used in the "ariF
and (ustoms (ode? (,-) SUGGESTED
ANS?ER:
"he term "Pe@!7*e ta!; c*a0)e "refers
to the authority
given to the &resident to ad2ust tariF rates
under /ection
014 of the "ariF and (ustoms (ode
which is the
enabling law that made effective the
delegation of the taxing power to the
&resident under the (onstitution!
QNote: 6t is suggested that if the
examinee cites the entire provision of
,ec. "(% of the TariO M !ustoms
!ode he should also be given full
credit!R
!ustoms: A&ministrati(e (s) Hu&icia" 8eme&ies (199,)
"he "ariff and (ustoms (ode allows the
Aureau of
(ustoms to resort to the administrative
remedy of sei$ure
such as by enforcing the tax lien on the
imported article and to the 2udicial remedy
of *ling an action in court! When does the
Aureau of (ustoms normally avail itselfC
(a) of the administrative instead of the
2udicial remedy
or
(b) of the latter instead of the
former remedy?
SUGGESTED ANSWER)
(a) "he Aureau of (ustoms normally avails
itself of the ;'<I8I/">;"I63 >3<3'7 of
sei$ure such as by enforcing the tax lien on
the imported articles instead of the 2udicial
remedy when the goods to which the tax
lien attaches regardless of ownership is
still in the custody or control of the
.overnment! In the case however of
importations which are prohibited or
undeclared the remedy of sei$ure and
forfeiture may still be exercised by the
Aureau of (ustoms even if the goods are no
longer in its custody!
(b) On the other hand when the goods are
properly released and thus beyond the reach
of tax lien the govern% ment can see#
payment of the tax liability through 2udicial
action since the tax liability of the importer
constitutes a personal debt to the
government therefore enforceable by
action! In this case 2udicial remedy is
normally availed of instead of the
administrative remedy!
!ustoms: Importation (1999)
When does importation begin and when
does it end?
SUGGESTED ANSWER)
I<&O>";"IO8 begins from the time the
carrying vessel or aircraft enters &hilippine
territorial 2urisdiction with the intention to
unload therein and ends at the time the goods
are released or withdrawn from the
customhouse upon
payment of the customs duties
or with legal
permit to withdraw (V!d01a v).
Bed!a"o# &8 SCRA
4
4
8)!
!ustoms: Huris&iction$ Sei?ure ; Forfeiture
Procee&ings
(199
6)
On Manuary 4 4JJH armed with warrants
of sei$ure and
detention issued by the Aureau of
(ustoms members of
the customs enforcement and
security services coordinated with the
Nue$on (ity police to search the premises
owned by a certain <r! ?o along Ualayaan
;venue Nue$on (ity which allegedly
contained untaxed vehicles and parts!
While inside the premises the member of
the customs enforcement and security
services noted articles which were not
included in the list contained in the
warrant! ?ence on Manuary 4, 4JJH an
amended warrant and sei$ure was issued!
On Manuary :, 4JJH the customs
personnel started hauling the articles
pursuant to the amended warrant! "his
prompted <r! ?o to *le a case for
in2unction and damages with a prayer for
a restraining order before the >egional
"rial (ourt of Nue$on (ity against the
Aureau of (ustoms on Manuary :L 4JJH!
On the same date the "rial (ourt issued a
temporary restraining order!
; motion to dismiss was *led by the
Aureau of (ustoms on the ground that the
>egional "rial (ourt has no 2uris% diction
over the sub2ect matter of the complaint
claiming that it was the Aureau of (ustoms
that has exclusive 2urisdiction over it!
'ecide!
SUGGESTED
ANSWER)
"he motion to dismiss should be granted!
/ei$ure and forfeiture proceedings are
within the exclusive 2urisdiction of the
(ollector of (ustoms to the exclusion of
regular (ourts! >egional "rial (ourts are
devoid of competence to pass upon the
validity or regularity of sei$ure and
forfeiture proceedings conducted by the
Aureau of (ustoms and to en2oin or
otherwise interfere with these proceedings
(Re(07*!c v). CFI o2 Ma+!*a
9Ba+c< XXII:# G.R. No. .8&.&#
Se(te67e 3# $%%3A >ao v). CA# G.R.
No. $/.-/.# Octo7e -# $%%4)!
!ustoms: Jin&s of !ustom 'uties (1999)
Ender the "ariff and (ustoms
(ode what are a) dumping duties
b) countervailing
duties c) mar#ing
duties
d) discriminatory
duties?
SUGGESTED ANSWER)
H) D06(!+" d0t!e) are special duties
imposed by the
/ecretary of Iinance upon
recommendation of the
"ariF (ommission when it is found that
the price of the imported articles is
deliberately or continually *xed at less
than the fair mar#et value or cost of
production and the importation
would cause or li#ely cause an in2ury
to local industries engaged in the
manufacture or production of the
same or similar articles or prevent
their establishment!
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
21 of 73
L) Co0+teva!*!+" d0t!e) are special
duties imposed
by the /ecretary of Iinance upon prior
investigation
and report of the "ariF (ommission to
oFset an
excise or inland revenue tax upon
articles of the same class
manufactured at home or subsidies to
foreign producers or manufacturers by
their respective governments!
=) MaB!+" d0t!e) are special duties
eDuivalent to ,- ad valorem imposed
on articles not properly mar#ed!
"hese are collected by the
(ommissioner of (ustoms except
when the improperly mar#ed
articles are exported or destroyed
under customs supervision and prior to
*nal liDuidation of the corresponding
entry! "hese duties are designed to
prevent possible deception of the
customers!
J) D!)c!6!+ato1 d0t!e) are special
duties collected in an amount not
exceeding 411- ad valorem imposed
by the &resident of the &hilippines
against goods of a foreign country
which discriminates against &hilippine
commerce or against goods coming
from the &hilippines and shipped to
a foreign country!
!ustoms: Jin&s of !ustom 'uties (199,)
3xplain briefly each of the special
customs duties
authori$ed under the "ariF and (ustoms
(ode!
SUGGESTED ANSWER)
"he following are the S(ec!a* D0t!e)
imposed under the
"ariff and (ustoms (ode:
(a) D06(!+" D0t1 % "his is a duty levied
on imported
goods where it appears that a specific
#ind or class of
foreign article is being imported into or
sold or is li#ely to be sold in the
&hilippines at a price less than its fair
valueC
(b) Co0+teva!*!+" D0t1 % "his is a duty
eDual to the ascertained or estimated
amount of the subsidy or bounty or
subvention granted by the foreign
country on the production manufacture
or exportation into the &hilippines of any
article li#ely to in2ure an industry in the
&hilippines or retard or considerable
retard the establishment of such
industryC
(c) MaB!+" D0t1 % "his is a duty on an
ad valorem basis imposed for improperly
mar#ed articles! "he law reDuires that
foreign importations must be mar#ed in
any oFicial language of the &hilippines the
name of the country of origin of the
articleC
(d) D!)c!6!+ato1 o Reta*!ato1 D0t1 %
"his is a duty imposed on imported goods
whenever it is found as a fact that the
country of origin discriminates against the
commerce of the &hilippines in such a
manner as to place the commerce of the
&hilippines at a disadvantage compared
with the commerce of any foreign country!
!ustoms: 8eme&ies of an Importer (1996)
'iscuss briefly the remedies of an importer
during the
pendency of sei$ure proceedings!
SUGGESTED
ANSWER)
'uring the pendency of sei$ure
proceedings the importer may secure the
release of the imported property for
legitimate use by posting a bond in an
amount to be fixed by the (ollector
conditioned for the payment of the
appraised value of the article andOor any
*ne expenses and costs which may be
ad2udged in the caseC provided that
articles the importation of which is
prohibited by law shall not be released
under bond.
"he importer may also oFer to pay to the
collector a *ne imposed by him upon the
property to secure its release or in case of
forfeiture the importer shall offer to pay
for the domestic mar#et value of the sei$ed
article which oFer sub2ect to the approval
of the (ommissioner may be accepted by
the (ollector in settlement of the sei$ure
case except when there is fraud! Epon
payment of the *ne or domestic mar#et
value the property shall be forthwith
released and all liabilities which may or
might attach to the property by virtue of
the oFense which was the occasion of the
sei$ure and all liability which might have
been incurred under any bond given by the
importer in respect to such property shall
thereupon be deemed to be discharged!
!ustoms: 8eturning 8esi&ents: TouristETra(e"ers
(24)
@ and his wife 7 Iilipinos living in the
&hilippines went
on a three%month pleasure trip around
the world during the months of Mune Muly
and ;ugust :11:! In the course of their
trip they accumulated some personal
effects which were necessary appropriate
and normally used in leisure trips as well
as souvenirs in non%commercial Duantities!
;re they "returning residents" for
purposes of /ection 41, of the "ariF and
(ustoms (ode? 3xplain! (=-)
SUGGESTED
ANSWER)
8o! "he term "returning residents"
refers to nationals who have stayed in a
foreign country for a period of at least six
(H) months! (,ection %(-(f) of the TariO
and !ustoms !ode). 'ue to their limited
duration of stay abroad @ and 7 are not
considered as "returning residents" but
they are merely considered as travelers or
tourists who en2oy the benefit of
conditionally free importation!
ANote: !redit must li>ewise be given if
the candidate answered
in the aOirmative considering that
travelers or tourists are given the same
tax treatment as that of returning
residents treating their personal
effects not in commercial
7uantities as conditionally free
importation.@
!ustoms: Sei?ure ; Forfeiture: 2ffects (199*)
In smuggling a shipment of garlic the
smugglers used an
eight%wheeler truc# which they hired for
the purpose of
ta#ing out the shipment from the customs
$one! 'anny the truc# owner did not have a
certi*cate of public convenience to operate
his truc#ing business! 'anny did not #now
that the shipment of garlic was illegally
imported!
(an the (ollector of (ustoms of the port
sei$e and forfeit
the truc# as an instrument in the
smuggling?
SUGGESTED ANSWER)
7es the (ollector of (ustoms of the port can
sei$e and forfeit the truc# as an instrument
in the smuggling activity since the same
was used unlawfully in the importation of
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
22 of 73
smuggled articles! "he mere carrying of
such articles on
board the truc# (in commercial Duantities)
shall sub2ect the truc# to forfeiture since
it was not being used as a duly authori$ed
common carrier which was chartered or
leased as such! (/ec! :,+1 QaR "(()
<oreover although forfeiture of the vehicle
will not be eFected if it is established that
the owner thereof had no #nowledge of or
participation in the unlawful act there
arises a prima facie presumption or
#nowledge or participation if the owner is
not in the business for which the
conveyance is generally used! "hus not
having a certi*cate of public convenience to
operate a truc#ing business he is legally
deemed not to have been engaged in the
truc#ing business! (,ec. &-5% TariO and
!ustoms !ode)
!ustoms: Steps in(o"(ing Protest !ases (199*)
"he (ollector of (ustoms instituted sei$ure
proceedings against a shipment of motor
vehicles for having been misdeclared as
second%hand vehicles! /tate the procedure
for the review of the decision up to the
/upreme (ourt of the (ollector of (ustoms
adverse to the importer! SUGGESTED ANSWER)
"he procedure in sei$ure cases may be
summari$ed as follows:
(a) "he collector issues a warrant for the
detention or forfeiture of the imported
articlesC (/ec! :+14 "ariF and (ustoms
(ode)
(b) "he (ollector gives the importer a
written notice of
the sei$ure and *xes a hearing date to
give the importer an opportunity to be
heardC (/ec! :+1+ "(()
(c) ; formal hearing is conductedC
(/ec! :+4: "(()
(d) "he (ollector renders a declaration
of forfeitureC (/ec! :+4: "(()
(e) "he Importer aggrieved by the
action of the (ollector in any case of
sei$ure may appeal to the (ommissioner
for his review within *fteen (4,) days
from written notice of the (ollectorBs
decisionC (/ec!
:+4+
"(()
(f) "he importer aggrieved by the action
or ruling of the
(ommissioner in any case of sei$ure
may appeal to the (ourt of "ax ;ppealsC
(/ec! :01: "(()
(g) "he importer adversely affected by
the decision of the (ourt of "ax
;ppeals ('ivision) may appeal to the
(ourt of "ax ;ppeals (en banc) within
*fteen (4,) days which may be extended
for another *fteen (4,) days or such
period as the (ourt of "ax ;ppeals may
decide!
!ustoms$ Basis of 'utia+"e Ca"ue$ Importe& Artic"e (29)
/tate and explain the basis of dutiable
value of an imported article sub2ect to an ad
valorem tax under the "ariff and (ustoms
(ode!
A+TERNATI1E ANSWER)
"he basis of dutiable value of an imported
article sub2ect to an ad valorem tax under the
"ariff and (ustoms (ode is its
">;8/;("IO8 6;5E3! (,ec. &(%AA@ TariO
and !ustoms !ode as amended by $.A. No.
*%5-) If such value could not be determined
then the following values are to be utili$ed in
their seDuence: Ta+)act!o+ va*0e o2
!de+t!ca* "o o d) (,ec. &(%A3@):
Ta+)act! o + va*0e o2
)!6!*a "ood) (,ec. &(%A!@):
Ded0ct!ve va*0e
(,ec. 66.4.% !A.C. No. "-&(("):
Co6(0ted va*0e (,ec.
66.<.l !.A.C. No. %-&(("() and
Fa**7acB va*0e! (,ec.
&(%
A<@)
A+TERNATI1E
ANSWER)
"he basis of dutiable value of an imported
article sub2ect to an ad valorem tax under
the "ariF and (ustoms (ode is its
transaction value which shall be the
price actually paid or payable for the
goods when sold for export to the
&hilippines ad2usted by adding certain
cost elements to the extent that they are
incurred by the buyer but are not included
in the price actually paid or payable for the
imported goods! (,ec. &(%AA@ TariO and
!ustoms !ode as amended by $.A. *%5-)
If such value could not be determined then
the following values are to be utili$ed in
their seDuence: "ransaction value of
identical goods (/ec! :14QAR)C "ransaction
value of similar goods (/ec! :14Q(R)C
'eductive value (/ec! II!3!4 (;!O! 8o! 0%
:110)C (omputed value (/ec! II!I!l (!;!O!
8o! 4%:1101) and Iallbac# value! (/ec!
:14QIR)
!ustoms$ !ounter(ai"ing 'uty (s) 'umping 'uty (29)
'istinguish countervailing duty from
dumping duty! (,-) SUGGESTED ANSWER)
"he distinctions between
countervailing duty and dumping duty
are the following:
(4) Aasis: "he countervailing duty is
imposed whenever
there is granted upon the imported article
by the country of origin a specific subsidy
upon its production manufacture or
exportation and this results or threatens
in2ury to local industry while the basis for
the imposition of dumping duty is the
importation and sale of imported items at
below their normal value causing or
li#ely to cause in2ury to local industry!
(:) ;mount: "he countervailing duty
imposed is
eDuivalent to the value of the specific
subsidy while the dumping duty is
eDuivalent to the margin of dumping
which is eDual to the diFerence between
the export price to the &hilippines and the
normal value of the imported article!
!ustoms$ Taxa+i"ity$ Persona" 2ffects
(29)
Macob after serving a ,%year tour of
duty as military
attache in Ma#arta returned to the
&hilippines bringing with him his personal
eFects including a personal computer and a
car! Would Macob be liable for taxes on these
items? 'iscuss fully! (,-)
SUGGESTED ANSWER)
8o Macob is not liable for taxes on his
personal computer and the car because he
is tax%exempt by law! ?e has met the
following reDuirements for exemption under
&!'! 8o!
J::
(4JLH):
a) ?e was a military attache
assigned to Ma#artaC
b) ?e has served abroad for not less than
two (:) yearsC
c) ?e is returning to the &hilippines
after serving his tour of dutyC and
d) ?e has not availed of the tax exemption
for the past four (0) years!
?e is entitled to tax exemption on his
personal and household eFects including a
carC provided
Answers to the BAR: Taxation 1994-2006 (Arranged by Topics sirdondee@gmail.com
2* of 73
a) "he car must have been ordered or
purchased prior
to the receipt by the &hilippine mission
or consulate in Ma#arta of MacobBs recall
orderC
b) the car is registered in
MacobBs nameC
c) the exemption shall apply to the
value of the carC
d) the exemption shall apply to the
aggregate value of his personal and
household eFects (including the personal
computer) not exceeding thirty per
centum (+1-) of the total amount
received by Macob as salary and
allowances during his assignment in
Ma#arta but not to exceed four (0) yearsC
e) Macob must not have availed of the
exemption more oftener than one every
four years! (?ast par. ,ec. %(- TariO
and !ustoms !ode)
OT/ER RE+ATED MATTERS
BI8: BanB 'eposits Secrecy Cio"ation (2)
; taxpayer is suspected not to have declared
his correct gross income in his return *led
for 4JJL! "he examiner reDuested the
(ommissioner to authori$e him to inDuire
into the ban# deposits of the taxpayer so
that he could proceed with the net worth
method of investigation to establish fraud!
<ay the examiner be allowed to loo# into
the taxpayerBs ban# deposits? In what cases
may the (ommissioner or his duly
authori$ed representative be allowed to
inDuire or loo# into the ban# deposits of a
taxpayer? (,-)
SUGGESTED ANSWER)
8o! as this would be violative of >epublic
;ct 8o! 401, the Aan# 'eposits /ecrecy
5aw!
"he (ommissioner of Internal >evenue or
his duly authori$ed representative may be
allowed to inDuire or loo# into the ban#
deposits of a taxpayer in the following
cases:
a) Ior the purpose of determining the
gross estate of a decedentC
b) Where the taxpayer has *led an
application for compromise of his tax
liability by reason of *nancial
incapacity to pay such tax liability! (/ec!
H (I) 8I>( of 4JJLR
c) Where the taxpayer has signed a
waiver
authori$ing the
(ommissioner or his
duly authori$ed
representatives to InDuire into the ban#
deposits!
BI8: Secrecy of BanB 'eposit /a1 (24)
@ dies in year :111 leaving a ban#
deposit of
&:111111!11 under 2oint account with his
associates in a law oFice! 5earning of @Bs
death from the newspapers the
(ommissioner of Internal >evenue wrote
to every ban# in the country as#ing them
to disclose to him the amount of deposits
that might be outstanding in his name or
2ointly with others at the date of his
death! <ay the ban# holding the deposit
refuse to comply on the ground of the
/ecrecy of Aan# 'eposit 5aw? 3xplain! (=-)
SUGGESTED ANSWER)
8o! "he (ommissioner of Internal >evenue
has the authority to inDuire into ban#
deposit accounts of a decedent to
determine his gross estate
notwithstanding the provisions of the Aan#
/ecrecy 5aw! ?ence the ban#s holding the
deposits in Duestion may not refuse to
disclose the amount of deposits on the
ground of secrecy of ban# deposits!
(/ection H(I) of the 4JJL "ax (ode)! "he
fact that the deposit is a 2oint account
will not preclude the (ommissioner
from inDuiring thereon because the law
mandates that if a ban# has #nowledge of
the death of a person who maintained a
ban# deposit account alone or 2ointly with
another it shall not allow any withdrawal
from the said deposit account unless the
(ommissioner has certi*ed that the
taxes imposed thereon have been paid!
(/ection JL of the 4JJL "ax (ode)!
?ence to be able to give the reDuired
certi*cation the inclusion of the deposit is
imperative which may be made possible
only through the inDuiry made by the
(ommissioner!

You might also like