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2016 Tax Bar Examinations

I
Briefly explain the following doctrines: lifeblood doctrine; necessity theory; benefits received principle; and,
doctrine of symbiotic relationship. (5%)
Answer:
1. Lifeblood Doctrine- that the existence of government is a necessity; that government cannot continue
without means to pay its expenses; and that for these means it has a right to compel its citizens and property
within its limits to contribute.
2. Necessity Theory- Taxation as stated in the case of Phil. Guaranty Co., Inc. v. Commissioner [13 SCRA
775],is a power predicated upon necessity. It is a necessary burden to preserve the States sovereignty and a
means to give the citizenry an army to resist aggression, a navy to defend its shores from invasion, a corps of
civil servants to serve, public improvements for the enjoyment of the citizenry, and those which come within
the States territory and facilities and protection which a government is supposed to provide.
3. Benefits received principle - This theory bases the power of the State to demand and receive taxes on the
reciprocal duties of support and protection. Thus, the taxpayer cannot question the validity of the tax law on
the ground that payment of such tax will render him impoverished, or lessen his financial or social standing,
because the obligation to pay taxes is involuntary and compulsory, in exchange for the protection and
benefits one receives from the government. protection for support and support for protection.
4. Doctrine of Symbiotic Relation - This doctrine is enunciated in CIR v. Algue, Inc. [158 SCRA 9], which states
that Taxes are what we pay for civilized society. Without taxes, the government would be paralyzed for lack
of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of
ones hard-earned income to the taxing authorities, every person who is able must contribute his share in the
burden of running the government.

II
State at least five (5) cases under the exclusive appellate jurisdiction of the Court of Tax Appeals (CTA). (5%)
Answer:
(a) Exclusive original or appellate jurisdiction to review by appeal the following:
(1) Decisions of the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue;
(2) Inaction by the Commissioner of Internal Revenue in cases involving disputed assessments, refunds of
internal revenue taxes, fees or other charges, penalties in relation thereto, or other matters arising under the
National Internal Revenue Code or other laws administered by the Bureau of Internal Revenue, where the
National Internal Revenue Code or other applicable law provides a specific period for action: Provided, that in
case of disputed assessments, the inaction of the Commissioner of Internal Revenue within the one hundred
eighty day-period under Section 228 of the National Internal revenue Code shall be deemed a denial for
purposes of allowing the taxpayer to appeal his case to the Court and does not necessarily constitute a formal
decision of the Commissioner of Internal Revenue on the tax case; Provided, further, that should the taxpayer
opt to await the final decision of the Commissioner of Internal Revenue on the disputed assessments beyond
the one hundred eighty day-period abovementioned, the taxpayer may appeal such final decision to the Court
under Section 3(a), Rule 8 of these Rules; and Provided, still further, that in the case of claims for refund of

taxes erroneously or illegally collected, the taxpayer must file a petition for review with the Court prior to the
expiration of the two-year period under Section 229 of the National Internal Revenue Code;
(3) Decisions, resolutions or orders of the Regional Trial Courts in local tax cases decided or resolved by them
in the exercise of their original jurisdiction;
(4) Decisions of the Commissioner of Customs in cases involving liability for customs duties, fees or other
money charges, seizure, detention or release of property affected, fines, forfeitures of other penalties in
relation thereto, or other matters arising under the Customs Law or other laws administered by the Bureau of
Customs;
(5) Decisions of the Secretary of Finance on customs cases elevated to him automatically for review from
decisions of the Commissioner of Customs adverse to the Government under Section 2315 of the Tariff and
Customs Code; and
(6) Decisions of the Secretary of Trade and Industry, in the case of nonagricultural product, commodity or
article, and the Secretary of Agriculture, in the case of agricultural product, commodity or article, involving
dumping and countervailing duties under Section 301 and 302, respectively, of the Tariff and Customs Code,
and safeguard measures under Republic Act No. 8800, where either party may appeal the decision to impose
or not to impose said duties;
III
Rakham operates the lending company that made a loan to Alfonso in the amount of Pl20,000.00 subject of a
promissory note which is due within one (1) year from the note's issuance. Three years after the loan became
due and upon information that Alfonso is nowhere to be found, Rakham asks you for advice on how to treat
the obligation as "bad debt." Discuss the requisites for deductibility of a "bad debt?" (5%)
Answer:
A debt need not necessarily be bad in the strict sense as described in paragraph 26. The question of whether
a debt is bad is a matter of judgment having regard to all the relevant facts. Guidelines for deciding when a
debt is bad are at paragraphs 31-32. Generally, provided a bona fide commercial decision is taken by a
taxpayer as to the likelihood of non-recovery of a debt, it will be accepted that the debt is bad for section 63
purposes. The debt, however, must not be merely doubtful.
To obtain a bad debt deduction under section 63 of the Act, a debt must exist before it can be written off as
bad. A debt exists for the purposes of section 63 where a taxpayer is entitled to receive a sum of money from
another either at law or in equity. The bad debt has to be written off in the year of income before a bad debt
deduction is allowable under section 63. The writing-off of a bad debt does not necessarily require highly
technical accounting entries. It is sufficient that some form of written record is kept to evidence the decision
of the taxpayer to write off the debt from the accounts.
Subsection 63(1) provides that:
'Debts which are bad debts and are written off as such during the year of income, and;
(a) have been brought to account as assessable income of any year; or
(b) are in respect of money lent in the ordinary course of the business of the lending of money by a taxpayer
who carries on that business,
shall be allowable deductions.'
Four conditions must be satisfied in order to qualify for a bad debt deduction.
First , a debt must exist.
Second , the debt must be bad.
Third , the debt must be written off as a bad debt during the year of income in which the deduction is claimed.

Fourth , the debt must have been brought to account as assessable income in any year or, in the case of a
money lender, the debt must be in respect of money lent in the ordinary course of the business of lending of
money by a taxpayer who carries on that business.

IV
The City of Maharlika passed an ordinance imposing a tax on any sale or transfer of real property located
within the city at a rate of fifty percent (50%) of one percent (1%) of the total consideration of the transaction.
Jose sold a parcel of land in the city, which he inherited from his deceased parents, and refused to pay the
aforesaid tax. He instead filed a case asking that the ordinance be declared null and void since the tax it
imposed can only be collected by the national government, as in fact he has paid the Bureau of Internal
Revenue (BIR) the required capital gains tax. If you were the City Legal Officer of Maharlika, what defenses
would you raise to sustain the validity of the ordinance? (5%)
Answer:
Section 5, Article X of the 1987 Constitution provides that "each local government unit shall have the power to
create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees,
and charges shall accrue exclusively to the local government." The Local Government Code supplements the
Constitution with Sections 151 and 186:
SEC. 151. Scope of Taxing Powers. Except as otherwise provided in this Code, the city may levy the taxes,
fees and charges which the province or municipality may impose: Provided, however, That the taxes, fees and
charges levied and collected by highly urbanized and independent component cities shall accrue to them and
distributed in accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes.
SEC. 186. Power to Levy Other Taxes, Fees or Charges. Local government units may exercise the power to
levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed
under the provisions of the National Internal Revenue Code, as amended, or other applicable laws: Provided,
That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to
declared national policy: Provided, further, That the ordinance levying such taxes, fees, or charges shall not be
enacted without any prior public hearing conducted for the purpose.
V
Sure Arrival Airways (SAA) is a foreign corporation, organized under the laws of the Republic of Nigeria. Its
commercial airplanes do not operate within Philippine territory, or service passengers embarking from
Philippine airports. The firm is represented in the Philippines by its general agent, Narotel.
SAA sells airplane tickets through Narotel, and these tickets are serviced by SAA airplanes outside the
Philippines. The total sales of airplane tickets transacted by Narotel for SAA in 2012 amounted to
Pl0,000,000.00. The Commissioner of Internal Revenue (CIR) assessed SAA deficiency income taxes at the
rate of 30% on its taxable income, finding that SAA's airline ticket sales constituted income derived from
sources within the Philippines.
SAA filed a protest on the ground that the alleged deficiency income taxes should be considered as income
derived exclusively from sources outside the Philippines since SAA only serviced passengers outside Philippine

territory. It, thus, asserted that the imposition of such income taxes violated the principle of territoriality in
taxation.
Is the theory of SAA tenable? Explain. (5%)
Answer:
No.
TAXATION; INCOME TAX; PROCEEDS FROM SALES OF AIRLINE TICKET SOLD IN THE PHILIPPINES; TAXABLE AS
INCOME FROM SOURCES WITHIN THE PHILIPPINES. In Commissioner of Internal Revenue vs . Air India and
the Court of Tax Appeals (G.R. No. 72443, January 29, 1988, 157SCRA 648) the Court held that the revenue
derived from the sales of airplane tickets through its agent Philippine Air Lines, Inc., here in the Philippines,
must be considered taxable income, and more recently, in the case of Commissioner of Internal Revenue vs .
American Airlines, Inc. and Court of Tax Appeals (G.R. No. 67938, December 19, 1989, 180 SCRA 274), it was
likewise declared that for the source of income to be considered as coming from the Philippines, it is sufficient
that the income is derived from activities within this country regardless of the absence of flight operations
within Philippine territory.
ID.; ID.; FOREIGN AIRLINE COMPANIES SELLING TICKET IN THE PHILIPPINES THROUGH LOCAL AGENT;
CONSIDERED RESIDENT FOREIGN CORPORATION DOING BUSINESS IN THE PHILIPPINES. There being no
dispute that JAL constituted PAL as local agent to sell its airline tickets, there can be noconclusion other than
that JAL is a resident foreign corporation, doing business in the Philippines. Indeed, the sale of tickets is the
very lifeblood of the airline business, the generation of sales being the paramount objective (Commissioner of
Internal Revenue vs . British Overseas Airways Corporation,[149 SCRA 395 ]).
(Commissioner of Internal Revenue vs . British Overseas Airways Corporation,[149 SCRA 395 ]).
The source of an income is the property, activity or service that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity
within the Philippines. In this case, the sale of tickets in the Philippines is the activity that produced the
income. The tickets exchanged hands here and payments for fares were also made here in Philippine
currency. The SITUS of the source of payments is the Philippines. The flow of wealth proceeded from, and
occurred within, Philippine territory, enjoying the protection accorded by the Philippine Government. So court
said, in consideration of such protection, the flow of wealth should share the burden of supporting the
government.

VI
Mapagbigay Corporation grants all its employees (rank and file, supervisors, and managers) 5% discount of
the purchase price of its products. During an audit investigation, the BIR assessed the company the
corresponding tax on the amount equivalent to the courtesy discount received by all the employees,
contending that the courtesy discount is considered as additional compensation for the rank and file
employees and additional fringe benefit for the supervisors and managers. In its defense, the company argues
that the discount given to the rank and file employees is a de minimis benefit and not subject to tax. As to its
managerial employees, it contends that the discount is nothing more than a privilege and its availment is
restricted.
Is the BIR assessment correct? Explain. (5%)
Answer:
YES!
De minimis benefits are benefits of relatively small values provided by the employers to the employee on top
of the basic compensation intended for the general welfare of the employees. Being of relatively small values,
the same is not being considered as a taxable compensation. For the employer, the amount of de minimis

provided is a deductible salaries expense, while for the employee, it would constitute as an additional salary
that is not deducted withholding tax on compensation.
For tax purposes, only the benefits considered as de minimis are considered as tax-exempt. All other
benefits given by the employers which are not included in the listing of de minimis benefits are not
considered as de minimis, and hence, subject to income tax as well as withholding tax on compensation
income.
The 2015 updated list:
1. Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year.
2. Monetized value of vacation and sick leave credits paid to government official and employees .
3. Medical cash allowance to dependents of employees, not exceeding P750 per employee per semester or
P125 per month.
4. Rice subsidy of P1,500 or one (1) sack of rice 50 kilogram rice per month amounting to not more than
P1,500.
5. Uniform and clothing allowance not exceeding P5,000 per annum.
6. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual
medical/executive check-up, maternity assistance, and routine consultations, not exceeding P10,000 per
annun.
7. Laundry allowance not exceeding P300 per month.
8. Employees achievement awards, e.g. for length of service or safety achievement, which must be in the
form of tangible personal property other than cash or gift certificate, with an annual monetary value not
exceeding P10,000 received by the employee under an established written plan which does not discriminate
in favor of highly paid employees;
9. Gifts made during Christmas and major anniversary celebrations not exceeding P5,000 per employee per
annum,
10. Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%)
of the basic minimum wage on a per region basis.
11. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and productivity
incentive schemes provided that the total monetary value received from both CBA and productivity incentive
schemes combined do not exceed P10,000.00 per employee per taxable year.
The limitation stated in the above list are very important. Any excess on the limit will be taxable and,
therefore, be subjected to the withholding tax. It is in the case when the employee is a rank-and-file
employee, that the benefits be subjected to the withholding tax and the normal income tax rate. However, if
the employee is a managerial or supervisory employee, it will be subjected to the 32% fringe benefit tax. But
before you consider it being taxable under normal income tax rate or fringe benefit tax, you have to consider
first the 13th month pay, bonuses plus the excess of the de minimis benefits received by the employee and
compare it to the limit of P82,000 (RR No. 3-2015 dated March 9, 2015). If the excess benefits, bonuses, and
the 13th month pay exceeds P82,000 limit, thats the time it is taxable

VII
Philippine National Railways (PNR) operates the rail transport of passengers and goods by providing train
stations and freight customer facilities from Tutuban, Manila to the Bicol Province. As the operator of the
railroad transit, PNR administers the land, improvements and equipment within its main station in Tutuban,
Manila.

Invoking Section 193 of the Local Government Code (LGC) expressly withdrawing the tax exemption privileges
of government-owned and controlled corporations upon the effectivity of the Code in 1992, the City
Government of Manila issued Final Notices of Real Estate Tax Deficiency in the amount of P624,000,000.00 for
the taxable years 2006 to 2010. On the other hand, PNR, seeking refuge under the principle that the
government cannot tax itself, insisted that the PNR lands and buildings are owned by the Republic.
Is the PNR exempt from real property tax? Explain your answer. (5%)
Answer: NO
Real Property Tax (RPT) is a tax that owners of real property need to pay every year so that the local
government unit (LGU) will not auction off their property. The power to impose the real property tax has been
given to provinces, cities, and municipal governments within the Metropolitan Manila area. The tax applies to
all forms of real property such as land, building, improvements, and machinery. Exemption is given to real
properties owned by government, charitable institutions, churches, cooperatives, and those that are used in
the supply of water and electric power. Equipment for pollution control and environmental protection is not
subject to tax.
SECTION 193. Withdrawal of Tax Exemption Privileges. - Unless otherwise provided in this Code, tax
exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical,
including government-owned or -controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby
withdrawn upon the effectivity of this Code.
For an entity to be considered as a GOCC, it must either be organized as a stock or non-stock corporation. Two
requisites must concur before one may be classified as a stock corporation, namely: (1) that it has capital
stock divided into shares, and (2) that it is authorized to distribute dividends and allotments of surplus and
profits to its stockholders. If only one requisite is present, it cannot be properly classified as a stock
corporation. As for non-stock corporations, they must have members and must not distribute any part of their
income to said members. On the basis of the parameters set in the MIAA case, the Authority should be
classified as an instrumentality of the national government. As such, it is generally exempt from payment of
real property tax, except those portions which have been leased to private entities.
PNR is Owned by Government of the Philippines under DOTr. The PNR Charter, Republic Act No. 4156, as
amended by Republic Act No. 6366 and Presidential Decree No. 741, provides that the PNR is a government
instrumentality under government ownership during its 50-year term, 1964 to 2014.
Under the Local Government Code of the Philippines of 1991 or Republic Act No. 7160, a real property tax
(RPT) in the Philippines ranging from 1% to 2% of the assessed value of the real property. Assessment of the
property is based on a certain percentage of the fair market value of the property depending on the actual
use of the property
VIII
In 2011, Solar Computer Corporation (Solar) purchased a proprietary membership share covered by
Membership Certificate No. 8 from the Mabuhay Golf Club, Inc. for P500,000.00. On December 27, 2012, it
transferred the same to David, its American consultant, to enable him to avail of the facilities of the Club.
David executed a Deed of Declaration of Trust and Assignment of Shares wherein he acknowledged the
absolute ownership of Solar over the share; that the assignment was without any consideration; and that the
share was placed in his name because the Club required it to be done. In 2013, the value of the share
increased to P800,000.00.
Is the said assignment a "gift" and, therefore, subject to gift tax? Explain. (5%)

Answer:
Yes.
Donors Tax is a tax on a donation or gift, and is imposed on the gratuitous transfer of property between two
or more persons who are living at the time of the transfer. It shall apply whether the transfer is in trust or
otherwise, whether the gift is direct or indirect and whether the property is real or personal, tangible or
intangible.
Gratuitous means that the property is transferred free of charge or that the donee (the receipient) does not
pay for it in receiving the property from the donor (the giver).
Donation made to a stranger is subject to 30% of the net gift. A stranger is a person who is not a: brother,
sister (whether by whole or half blood), spouse, ancestor and lineal descendants; or relative by consanguinity
in the collateral line within the fourth degree of relationship.

IX
[a] Explain the procedure for claiming refunds or tax credits of input Value Added Tax (VAT) for zero-rated or
effectively zero-rated sales under Sec. 112 of the National Internal Revenue Code (NIRC) from the filing of an
application with the CIR up to the CTA. (2.5%)
Answer:
Section 112 of the NIRC provides for the rules to be followed in claiming a refund/tax credit of unutilized input
VAT. Subsections (A) and (C) thereof provide that:
Sec. 112. Refunds or Tax Credits of Input Tax.
Zero-Rated or Effectively Zero-Rated Sales. Any VAT-registered person, whose sales are zero-rated or
effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid
attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied
against output tax: Provided, however, That in the case of zero-rated sales under Section 106(A)(2)(a)(1), (2)
and (b) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange proceeds thereof had been
duly accounted for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP):
Provided, further, That where the taxpayer is engaged in zero-rated or effectively zero-rated sale and also in
taxable or exempt sale of goods of properties or services, and the amount of creditable input tax due or paid
cannot be directly and entirely attributed to any one of the transactions, it shall be allocated proportionately
on the basis of the volume of sales: Provided, finally, That for a person making sales that are zero-rated under
Section 108 (B)(6), the input taxes shall be allocated ratably between his zero-rated and non-zero-rated sales.
(C) Period within which Refund or Tax Credit of Input Taxes shall be Made.-In proper cases, the Commissioner
shall grant a refund or issue the tax credit certificate for creditable input taxes within one hundred twenty
(120) days from the date of submission of complete documents in support of the application filed in
accordance with Subsection (A) hereof.
Any unutilized input VAT attributable to zero-rated or effectively zero-rated sales may be claimed as a
refund/tax credit. Initially, claims for refund/tax credit for unutilized input VAT should be filed with the BIR,
together with the complete documents in support of the claim. Pursuant to Section 112(A) of the NIRC, the
administrative claim for refund/tax credit must be filed with the BIR within two years after the close of the
taxable quarter when the sales were made.

Under Section 112(C) of the NIRC, the CIR is given 120 days from the submission of complete documents in
support of the application for refund/tax credit within which to either grant or deny the claim. In case of (1) full
or partial denial of the claim or (2) the failure of the CIR to act on the claim within 120 days from the
submission of complete documents, the taxpayer-claimant may, within 30 days from receipt of the CIR
decision denying the claim or after the lapse of the 120-day period, file a petition for review with the CTA.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of the
Commissioner to act on the application within the period prescribed above, the taxpayer affected may, within
thirty (30) days from the receipt of the decision denying the claim or after the expiration of the one hundred
twenty-day period, appeal the decision or the unacted claim with the Court of Tax Appeals.
[b] Explain the procedure for claiming refunds of tax erroneously or illegally collected under Sec. 229 of the
NIRC from the filing of the claim for refunds with the CIR up to the CTA. (2.5%)
A simple reading of Section 229 reveals that it only pertains to taxes erroneously or illegally collected:
SEC. 229. Recovery of Tax Erroneously or Illegally Collected. - No suit or proceeding shall be maintained in any
court for the recovery of any national internal revenue tax hereafter alleged to have been erroneously or
illegally assessed or collected or of any penalty claimed to have been collected without authority, or of any
sum alleged to have been excessively or in any manner wrongfully collected, until a claim for refund or credit
has been duly filed with the Commissioner; but such suit or proceeding may be maintained, whether or not
such tax, penalty, or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the date of
payment of the tax or penalty regardless of any supervening cause that may arise after payment: Provided,
however, That the Commissioner 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.

X
Congress issued a law allowing a 20% discount on the purchases of senior citizens from, among others,
recreation centers. This 20% discount can then be used by the sellers as a "tax credit." At the initiative of BIR,
however, Republic Act No. (RA) 9257 was enacted amending the treatment of the 20% discount as a "tax
deduction." Equity Cinema filed a petition with the RTC claiming that RA 9257 is unconstitutional as it forcibly
deprives sellers a part of the price without just compensation.
[a] What is the effect of converting the 20% discount from a "tax credit" to a "tax deduction"? (2.5%)
Answer:

1) The difference between the Tax Credit (under the Old Senior Citizens Act) and Tax Deduction (under the
Expanded Senior Citizens Act).
1.1. The provision of Section 4 of R.A. No. 7432 (the old Senior Citizens Act) grants twenty percent (20%)
discount from all establishments relative to the utilization of transportation services, hotels and similar
lodging establishment, restaurants and recreation centers and purchase of medicines anywhere in the
country, the costs of which may be claimed by the private establishments concerned as tax credit.
Effectively, a tax credit is a peso-for-peso deduction from a taxpayers tax liability due to the government of
the amount of discounts such establishment has granted to a senior citizen. The establishment recovers the
full amount of discount given to a senior citizen and hence, the government shoulders 100% of the discounts
granted.
It must be noted, however, that conceptually, a tax credit scheme under the Philippine tax system,
necessitates that prior payments of taxes have been made and the taxpayer is attempting to recover this tax
payment from his/her income tax due. The tax credit scheme under R.A. No. 7432 is, therefore, inapplicable
since no tax payments have previously occurred.
1.2.
The provision under R.A. No. 9257, on the other hand, provides that the establishment concerned
may claim the discounts under Section 4(a), (f), (g) and (h) as tax deduction from gross income, based on the
net cost of goods sold or services rendered.
Under this scheme, the establishment concerned is allowed to deduct from gross income, in computing for its
tax liability, the amount of discounts granted to senior citizens. Effectively, the government loses in terms of
foregone revenues an amount equivalent to the marginal tax rate the said establishment is liable to pay the
government. This will be an amount equivalent to 32% of the twenty percent (20%) discounts so granted. The
establishment shoulders the remaining portion of the granted discounts.
A simple illustration might help amplify the points discussed above, as follows:
Tax Deduction Tax Credit
Gross Sales x x x x x x x x x x x x
Less : Cost of goods sold x x x x x x x x x x
Net Sales x x x x x x x x x x x x
Less: Operating Expenses:
Tax Deduction on Discounts x x x x -Other deductions: x x x x x x x x
Net Taxable Income x x x x x x x x x x
Tax Due x x x x x x
Less: Tax Credit -- ______x x
Net Tax Due -- x x
As shown above, under a tax deduction scheme, the tax deduction on discounts was subtracted
from Net Sales together with other deductions which are considered as operating expenses
before the Tax Due was computed based on the Net Taxable Income.
On the other hand, under a tax credit scheme, the amount of discounts which is the tax credit
item, was deducted directly from the tax due amount
[b] If you are the judge, how will you decide the case? Briefly explain your answer. (2.5%)
Answer:
Just compensation is defined as the full and fair equivalent of the property taken from its owner by the
expropriator. The measure is not the takers gain but the owners loss. The word just is used to intensify the

meaning of the word compensation, and to convey the idea that the equivalent to be rendered for the
property to be taken shall be real, substantial, full and ample.
A tax deduction does not offer full reimbursement of the senior citizen discount. As such, it would not meet
the definition of just compensation. Having said that, this raises the question of whether the State, in
promoting the health and welfare of a special group of citizens, can impose upon private establishments the
burden of partly subsidizing a government program.
The Court believes so.
The Senior Citizens Act was enacted primarily to maximize the contribution of senior citizens to nationbuilding, and to grant benefits and privileges to them for their improvement and well-being as the State
considers them an integral part of our society. The priority given to senior citizens finds its basis in the
Constitution as set forth in the law itself.
The law is a legitimate exercise of police power which, similar to the power of eminent domain, has general
welfare for its object. Police power is not capable of an exact definition, but has been purposely veiled in
general terms to underscore its comprehensiveness to meet all exigencies and provide enough room for an
efficient and flexible response to conditions and circumstances, thus assuring the greatest benefit.
Accordingly, it has been described as the most essential, insistent and the least limitable of powers, extending
as it does to all the great public needs. It is [t]he power vested in the legislature by the constitution to make,
ordain, and establish all manner of wholesome and reasonable laws, statutes, and ordinances, either with
penalties or without, not repugnant to the constitution, as they shall judge to be for the good and welfare of
the commonwealth, and of the subjects of the same.
For this reason, when the conditions so demand as determined by the legislature, property rights
must bow to the primacy of police power because property rights, though sheltered by due
process, must yield to general welfare.

XI
Soaring Eagle paid its excise tax liabilities with Tax Credit Certificates (TCCs) which it purchased through the
One Stop Shop Inter-Agency Tax Credit Center (Center) of the Department of Finance. The Center is a
composite body of the DOF, BIR, BOC and the BOI. The TCCs ~ere accepted by the BIR as payments. A year
after, the BIR demanded the payment of alleged deficiency excise taxes on the ground that Soaring Eagle is
not a qualified transferee of the TCCs it purchased from other BOI-registered companies. The BIR argued that
the TCCs are subject to post-audit as a suspensive condition. On the other hand, Soaring Eagle countered that
it is a buyer in good faith and for value who merely relied on the Center's representation of the genuineness
and validity of the TCCs. If it is ordered to pay the deficiency, Soaring Eagle claims the same is confiscatory
and a violation of due process. Is the assessment against Soaring Eagle valid? Explain. (5%)
Answer:
No
It is a well-settled rule in jurisprudence that TCCs are valid and effective from their issuance and are not
subject to a post-audit as a suspensive condition for their validity. Thus, Soaring Eagle has the right to rely on
the validity and effectivity of the TCCs that were assigned to it. In finally determining their effectivity in the
settlement of Soaring Eagles' deficiency tax liabilities, the validity of those TCCs should not depend on the
results of the DOFs post-audit findings.

As an exception, the transferee/assignee may be held liable if proven to have been a party to the fraud or to
have had knowledge of the fraudulent issuance of the subject TCCs. But here, the parties entered into a joint
stipulation of facts stating that Petron did not participate in the procurement or issuance of those TCCs. Thus,
the exception to the rule is not applicable as Soaring Eagle was an innocent transferee for value of the TCCs.
As a general rule, the principle of estoppel does not apply to the government, especially on matters of
taxation. Taxes are the nations lifeblood through which government agencies continue to operate and with
which the State discharges its functions for the welfare of its constituents. The exception however is that this
rule cannot be applied it if it would work injustice against an innocent party.
Soaring Eagle has not been proven to have had any participation in or knowledge of the CIRs allegation of
fraudulent transfer and utilization of the TCCs. Soaring Eagles status as an innocent purchaser for value has
been established and even stipulated upon by the CIR. Petron was thereby amply protected from the adverse
findings subsequently made by the DOF agency. ##

XII
The Philippine-British Association, Inc. (Association) is a non-stock, non-profit organization which owns the St.
Michael's Hospital (Hospital). Sec. 216 in relation to Sec. 215 of the LGC classifies all lands, buildings and
other improvements thereon actually, directly, and exclusively used for hospitals as "special." A special
classification prescribes a lower assessment than a commercial classification.
Within the premises of the Hospital, the Association constructed the St. Michael's Medical Arts Center (Center)
which will house medical practitioners who will lease the spaces therein for their clinics at prescribed rental
rates. The doctors who treat the patients confined in the Hospital are accredited by the Association.
The City Assessor classified the Center as "commercial" instead of "special" on the ground that the Hospital
owner gets income from the lease of its spaces to doctors who also entertain out-patients. Is the City Assessor
correct in classifying the Center as "commercial?" Explain. (5%)
Answer:
No.
A. The St. Michael's Medical Arts Center facility is definitely incidental to and reasonably necessary for the
operations of St. Michael's Hospital. the St. Michael's Medical Arts Center facility is primarily used by the
hospitals accredited physicians to perform medical check-up, diagnosis, treatment, and care of patients. For
another, it also serves as a specialized outpatient department of the hospital.
Thus, the importance of St. Michael's Medical Arts Center in the operation of St. Michael's Hospital cannot be
over-emphasized nor disputed. Clearly, it plays a key role and provides critical support to hospital operations.
B. Charging rentals for the offices used by its accredited physicians cannot be equated to a commercial
venture. There is no reason why the SMMACF building should be classified as commercial and be imposed the
commercial level of 35% as it is not operated primarily for profit but as an integral part of SMH. The SMMACF,
with operations being devoted for the benefit of the SMHs patients, should be accorded the 10% special
assessment.
XIII
Pursuant to Sec. 11 of the "Host Agreement" between the United Nations and the Philippine government, it
was provided that the World Health Organization (WHO), "its assets, income and other properties shall be : a)
exempt from all direct and indirect taxes." Precision Construction Corporation (PCC) was hired to construct the

WHO Medical Center in Manila. Upon completion of the building, the BIR assessed a 12% VAT on the gross
receipts of PCC derived from the construction of the WHO building. The BIR contends that the 12% VAT is not a
direct nor an indirect tax on the WHO but a tax that is primarily due from the contractor and is therefore not
covered by the Host Agreement. The WHO argues that the VAT is deemed an indirect tax as PCC can shift the
tax burden to it. Is the BIR correct? Explain. (5%)
Answer:
No.
The 3% contractors tax imposed upon petitioner is covered by the direct and indirect tax exemption
granted to WHO. Hence, petitioner cannot be held liable for such contractors tax. The Supreme Court
explained that direct taxes are those that are demanded from the very person who, it is intended or desired,
should pay them; while indirect taxes are those that are demanded in the first instance from one person in the
expectation and intention that he can shift the burden to someone else. While it is true that the contractor's
tax is payable by the contractor, However in the last analysis it is the owner of the building that shoulders the
burden of the tax because the same is shifted by the contractor to the owner as a matter of self-preservation.
Thus, it is an indirect tax against the WHO because, although it is payable by the petitioner, the latter can shift
its burden on the WHO.
Value-Added Tax is a form of sales tax. It is a tax on consumption levied on the sale, barter, exchange or lease
of goods or properties and services in the Philippines and on importation of goods into the Philippines. It is an
indirect tax, which may be shifted or passed on to the buyer, transferee or lessee of goods, properties or
services.

XIV
Lucky V Corporation (Lucky) owns a IO-storey building on a 2,000 square meter lot in the City of Makati. It sold
the lot and building to Rainier. for P80 million. One month after, Rainier sold the lot and building to Healthy
Smoke Company (HSC) for P200 million. Lucky filed its annual tax return and declared its gain from the sale of
the lot and building in the amount of P750,000.00.
An investigation conducted by the BIR revealed that two months prior to the sale of the properties to Rainier,
Lucky received P40 million from HSC and not from Rainier. Said amount of P40 million was debited by HSC and
reflected in its trial balance as "other inv. - Lucky Bldg." The month after, another P40 million was reflected in
HSC's trial balance as "other inv. - Lucky Bldg." The BIR concluded that there is tax evasion since the real
buyer of the properties of Lucky is HSC and not Rainier. It issued an assessment for deficiency income tax in
the amount of P79 million against Lucky. Lucky argues that it resorted to tax avoidance or a tax saving device,
which is allowed by the NIRC and BIR rules since it paid the correct taxes based on its sale to Rainier. On the
other hand, Rainier and HSC also paid the prescribed taxes arising from the sale by Rainier to HSC. Is the BIR
correct in assessing taxes on Lucky? Explain. (5%)
Answer: Yes, BIR is correct in assessing taxes on Lucky.
In CIR vs. Estate of Benigno Toda, Yes! The scheme, resorted to by Lucky in making it appear that there were
two sales of the subject properties, i.e., from Lucky to Rainier, and then from Rainer to HSC cannot be
considered a legitimate tax planning. Such scheme is tainted with fraud.
Fraud in its general sense, is deemed to comprise anything calculated to deceive, including all acts,
omissions, and concealment involving a breach of legal or equitable duty, trust or confidence justly reposed,
resulting in the damage to another, or by which an undue and unconscionable advantage is taken of another.

The two sale transactions should be treated as a single direct sale by Lucky to HSC.

XV
Peter is the Vice-President for Sales of Golden Dragon Realty Conglomerate, Inc. (Golden Dragon). A group of
five (5) foreign investors visited the country for possible investment in the condominium units and subdivision
lots of Golden Dragon. After a tour of the properties for sale, the investors were wined and dined by Peter at
the posh Conrad's Hotel at the cost of Pl 50,000.00. Afterward, the investors were brought to a party in a
videoke club which cost the company P200,000.00 for food and drinks, and the amount of P80,000.00 as tips
for business promotion officers. Expenses at Conrad's Hotel and the videoke club were receipted and
submitted to support the deduction for representation and entertainment expenses. Decide if all the
representation and entertainment expenses claimed by Golden Dragon are deductible. Explain. (5%)
Answer:
REVENUE REGULATIONS NO. 10-2002
1.Wined and Dined Conrad's Hotel at the cost of Pl50,000.00 - YES
2.Videoke club which cost the company P200,000.00 for food and drinks - YES
3. The amount of P80,000.00 as tips for business promotion officers- YES
The term
Representation Expenses shall refer to expenses incurred by a taxpayer in connection with the
conduct of his trade, business or exercise of profession, in entertaining, providing amusement
and recreation to, or meeting with, a guest or guests at a dining place, place of amusement,
country club, theater, concert, play, sporting event, and similar events or places . For purposes of
these Regulations, representation expenses shall not refer to fixed representation allowances that are subject
to withholding tax on wages pursuant to appropriate revenue regulations.
In the case particularly of a country, golf, sports club, or any other similar club where the employee or officer
of the taxpayer is the registered member and the expenses incurred in relation thereto are paid for by the
taxpayer, there shall be a presumption that
such expenses are fringe benefits subject to fringe benefits tax unless the taxpayer can prove that these are
actually representation expenses. For purposes of proving that said expense is a representation expense and
not fringe benefits, the taxpayer should maintain
receipts and adequate records that indicate the (a) amount of expense (b) date and place of expense (c)
purpose of expense (d) professional or business relationship of expense (e) name of person and company
entertained with contact details.
The term
Entertainment Facilities shall refer to (1) a yacht, vacation home or condominium; and (2) any
similar item of real or personal property used by the taxpayer primarily for the entertainment,
amusement, or recreation of guests or employees. To be considered an entertainment facility, such
yacht, vacation home or condominium, or item of real or personal property must be owned or form part of the
taxpayers trade, business or profession, or rented by such taxpayer, for which the taxpayer claims a

depreciation or rental expense. A yacht shall be considered an entertainment facility under these Regulations
if its use is in fact not restricted to specified officers or employees or positions in such a manner as to make
the same a fringe benefit for purposes of imposing the fringe benefits tax.
SECTION 3. EXCLUSIONS
- The following expenses are not considered entertainment, amusement and recreation expenses as
defined under Section 2 hereof:
a.
Expenses which are treated as compensation or fringe benefits for services rendered under an
employer-employee relationship, pursuant to Revenue Regulations 2-98, 3-98 and amendments thereto;
b. Expenses for charitable or fund raising events;
c. Expenses for bonafide business meeting of stockholders, partners or directors;
d.
Expenses for attending or sponsoring an employee to a business league or professional organization
meeting;
e. Expenses for events organized for promotion, marketing and advertising including concerts,
conferences, seminars, workshops, conventions, and other similar events;
f.

Other expenses of a similar nature.

XVI
Amor Powers, Inc. (API) is a domestic corporation registered with the BIR as a value-added taxpayer. API
incurred excess input VAT in the amount of P500,000,000.00 on August 3, 2008. Hence, it filed with the BIR an
administrative claim for the refund or credit of these input taxes on August 15, 2010. Without waiting for the
CIR to act on its claim, API filed a Petition for Review with the CT A on September 15, 2010 before the lapse of
two years after the close of the taxable quarter concerned.
In its Comment on the Petition, the CIR argues that API's Petition should be dismissed as it was filed before the
lapse of the 120-day period given to the CIR by Sec. 112(D) of the NIRC, which became effective on January 1,
1998. For the CIR, the 120- day period is mandatory and jurisdictional so that any suit filed before its
expiration is premature and, therefore, dismissible.
API, on the other hand, invokes BIR Ruling No. DA-489-03 issued by the CIR on December 10, 2003 in answer
to a query posed by the Department of Finance regarding the propriety of the actions taken by Lazi Bay
Resources Development, Inc., which filed an administrative claim for refund with the CIR and, before the lapse
of the 120-day period from its filing, filed a judicial claim with the CTA. BIR Ruling No. DA-489-03 stated that
the taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief with
the CTA.
Will API's Petition for Review prosper? Decide with reasons. (5%)
Answer: NO
In the landmark case of Aichi, it was held that the observance of the 120-day period is a mandatory and
jurisdictional requisite to the filing of a judicial claim for refund before the CTA. As such, its non-observance
would warrant the dismissal of the judicial claim for lack of jurisdiction. It was, withal, delineated in Aichi that
the two (2)-year prescriptive period would only apply to administrative claims, and not to judicial claims.
Accordingly, once the administrative claim is filed within the two (2)-year prescriptive period, the taxpayerclaimant must wait for the lapse of the 120- day period and, thereafter, he has a 30-day period within which to
file his judicial claim before the CTA, even if said 120-day and 30-day periods would exceed the
aforementioned two (2)-year prescriptive period.
Nevertheless, the Court, in the case of CIR v. San Roque Power Corporation(San Roque), recognized an
exception to the mandatory and jurisdictional nature of the 120-day period. San Roque

enunciated that BIR Ruling No. DA-489-03 dated December 10, 2003, which expressly declared that
the "taxpayer-claimant need not wait for the lapse of the 120-day period before it could seek judicial relief
with the CTA by way of petition for review," provided a valid claim for equitable estoppel under Section 24639
of the NIRC.
In the more recent case of Taganito Mining Corporation v. CIR, the Court reconciled the pronouncements
in Aichi and San Roque, holding that from December 10, 2003 to October 6, 2010 which refers to the
interregnum when BIR Ruling No. DA-489-03 was issued until the date of promulgation of Aichi, taxpayerclaimants need not observe the stringent 120-day period; but before and after said window
period, the mandatory and jurisdictional nature of the 120-day period remained in force, viz.:
Reconciling the pronouncements in the Aichi and San Roque cases, the rule must therefore be that during the
period December 10, 2003 (when BIR Ruling No. DA-489-03 was issued) to October 6, 2010 (when the
Aichi case was promulgated), taxpayers-claimants need not observe the 120-day period before it could file
a judicial claim for refund of excess input VAT before the CTA. Before and after the aforementioned
period (i.e., December 10, 2003 to October 6, 2010), the observance of the 120-day period is
mandatory and jurisdictional to the filing of such claim.
XVII
The requisites for a valid waiver of the three-year (3-year) prescriptive period for the BIR to assess taxes due
in the taxable year are prescribed by Revenue Memorandum Order (RMO) No. 20-90:
1. The waiver must be in the proper form prescribed by RMO 20-90.
2. The waiver must be signed by the taxpayer himself or his duly authorized representative. In the case
of a corporation, the waiver must be signed by any of its responsible officials. In case the authority is
delegated by the taxpayer to a representative, such delegation should be in writing and duly notarized.
3. The waiver should be duly notarized.
4. The CIR or the revenue official authorized by him must sign the waiver indicating that the BIR has
accepted and agreed to the waiver. The date of such acceptance by the BIR should be indicated.
However, before signing the waiver, the CIR or the revenue official authorized by him must make sure
that the waiver is in the prescribed form, duly notarized, and executed by the taxpayer or his duly
authorized representative.
5. Both the date of execution by the taxpayer and date of acceptance by the Bureau should be before
the expiration of the period of prescription or before the lapse of the period agreed upon in case a
subsequent agreement is executed.
6. The waiver must be executed in three copies, the original copy to be attached to the docket of the
case, the second copy for the taxpayer and the third copy for the Office accepting the waiver. The fact
of receipt by the taxpayer of his/her file copy must be indicated in the original copy to show that the
taxpayer was notified of the acceptance of the BIR and the perfection of the agreement.
After being assessed by the BIR with alleged deficiency income taxes, VVV Corporation (VVV) through Enrique,
its President, executed a waiver of the prescriptive period. The waiver was signed by Revenue District Officer
(RDO) Alfredo. However, the waiver did not state the date of execution by the taxpayer and date of
acceptance by the BIR. Enrique was also not furnished a copy of the waiver by the BIR.
VVV claims that the waiver is void due to non-compliance with RMO 20-90. Hence, the period for assessment
had already prescribed. Moreover, since the assessment involves P2 million, the waiver should have been
signed by the CIR and instead of a mere RDO. On the other hand, the BIR contends that the requirements of
RMO No. 20-90 are merely directory; that the execution of the waiver by VVV was a renunciation of its right to

invoke prescription and that the government cannot be estopped by the mistakes committed by its revenue
officers. Is VVV liable? Explain. (5%)
Answer:
No.
Applying RMO No. 20-90, which implements Sections 203 and 222, the waiver in question here was defective
and did not validly extend the original three-year prescriptive period. Firstly, it was not proven that
respondent was furnished a copy of the BIR-accepted waiver. Secondly, the waiver was signed only by a
revenue district officer, when it should have been signed by the Commissioner as mandated by the NIRC and
RMO No. 20-90, considering that the case involves an amount of more than P1 million, and the period to
assess is not yet about to prescribe. Lastly, it did not contain the date of acceptance by the Commissioner of
Internal Revenue, a requisite necessary to determine whether the waiver was validly accepted before the
expiration of the original three-year period. Bear in mind that the waiver in question is a bilateral agreement,
thus necessitating the very signatures of both the Commissioner and the taxpayer to give birth to a valid
agreement.
BIR was wrong. RMO No. 20-90 must be strictly followed and not directory. In Philippine Journalists, Inc. v.
Commissioner of Internal Revenue,[18] we ruled that a waiver of the statute of limitations under the NIRC, to
a certain extent being a derogation of the taxpayers right to security against prolonged and unscrupulous
investigations, must be carefully and strictly construed.
Consequently, petitioner cannot rely on its invocation of the rule that the government cannot be estopped by
the mistakes of its revenue officers in the enforcement of RMO No. 20-90 because the law on prescription
should be interpreted in a way conducive to bringing about the beneficent purpose of affording protection to
the taxpayer within the contemplation of the Commission which recommended the approval of the law.
In fine, Assessment Notice was issued beyond the three-year prescriptive period. The waiver was incomplete
and defective and thus, the three-year prescriptive period was not tolled nor extended.

XVIII
Henry, a U.S. naturalized citizen, went home to the Philippines to reacquire Philippine citizenship under RA
9225. His mother left him a lot and building in Makati City and he wants to make use of it in his trading
business. Considering that he needs money for the business, he wants to sell his lot and building and make
use of the consideration. However, the lot has sentimental value and he wants to reacquire it in the future. A
friend of Henry told him of the "sale-leaseback transaction" commonly used in the U.S., which is also used for
tax reduction. Under said transaction, the lot owner sells his property to a buyer on the condition that he
leases it back from the buyer. At the same time, the property owner is granted an option to repurchase the lot
on or before an agreed date. Henry approaches you as a tax lawyer for advice.
Explain what tax benefits, if any, can be obtained by Henry and the buyer from the sale-leaseback
transaction? (5%)
Answer:
A "sale/leaseback" or "sale and leaseback" is a transaction in which the owner of a property sells an asset,
typically real estate, and then leases it back from the buyer. In this way the transaction functions as a loan,
with payments taking the form of rent.

Sale-Leaseback Treatment by Lessee:


If a sale-leaseback transaction qualifies as a capital lease, the lessee classifies the lease as a capital lease.
Otherwise, classify it as an operating lease.
The lessee should defer its recognition of a profit or loss on the sale portion of the transaction, except when
one of the following conditions is present:
Rights relinquished. The seller leases back only a minor portion of the property sold, in which case the sale
and the lease elements are to be accounted for separately.
Partial rights retention. The seller leases back less than the entire amount of the property sold, but more than
a minor amount, and realizes a profit greater than either the present value of the minimum lease payments (if
classified as an operating lease) or the recorded amount of the leased asset (if classified as a capital lease).
Fair value less than cost. If the fair value of the property on the transaction date is less than its undepreciated
cost, recognize a loss at once.
Sale-Leaseback Treatment by Lessor
If a sale-leaseback transaction meets the criteria for a capital lease, the lessor should record the property sale
as a purchase and an associated direct financing lease. Otherwise, the lessor still records the property sale as
a purchase, but accounts for the associated lease as an operating lease
Operating lease is a contract wherein the owner, called the Lessor, permits the user, called the Lesse, to use
of an asset for a particular period which is shorter than the economic life of the asset without any transfer of
ownership rights.

XIX
Jennifer is the only daughter of Janina who was a resident in Los Angeles, California, U.S.A. Janina died in the
U.S. leaving to Jennifer one million shares of Sun Life (Philippines), Inc., a corporation organized and existing
under the laws of the Republic of the Philippines. Said shares were held in trust for Janina by the Corporate
Secretary of Sun Life and the latter can vote the shares and receive dividends for Janina. The Internal Revenue
Service (IRS) of the U.S. taxed the shares on the ground that Janina was domiciled in the U.S. at the time of
her death.
[a] Can the CIR of the Philippines also tax the same shares? Explain. (2.5%)
Yes, Indirect duplicate taxation- not prohibited and usually allowed provided no violation of equal
protection and uniformity clauses in the constitution. There are two or more pecuniary impositions on a
subject matter.
Remedies of Double or Multiple Taxation
1. Provide for exemption;
2. Allowance for tax deduction

3. Allowance for tax credit for foreign taxes


4. Enter into treaties with other states
5. Allowance of the principle of reciprocity.
[b] Explain the concept of double taxation. (2.5%)
Double taxation- both taxes where imposed in the same year for the same purpose, upon property
owned by the same person and by the same taxing authority.
Kinds:
1. Direct duplicate taxation- the same property is taxed twice when it should only be taxed once.
(prohibited)
2. Indirect duplicate taxation- not prohibited and usually allowed provided no violation of equal
protection and uniformity clauses in the constitution. There are two or more pecuniary impositions on a
subject matter.
XX

Patrick is a successful businessman in the United States and he is a sole proprietor of a supermarket which
has a gross sales of $10 million and an annual income of $3 million. He went to the Philippines on a visit and,
in a party, he saw Atty. Agaton who boasts of being a tax expert. Patrick asks Atty. Agaton: if he (Patrick)
decides to reacquire his Philippine citizenship under RA 9225, establish residence in this country, and open a
supermarket in Makati City, will the BIR tax him on the income he earns from his U.S. business? If you were
Atty. Agaton, what advice will you give Patrick? (5%)

Answer:

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