Chapter 6 Exclusions from Gross Income.pdf

Reviewer in Taxation (Book 1)

Asser S. Tamayo (2012 Edition)

CHAPTER 6 EXCLUSIONS FROM GROSS INCOME 1. It refers to income received or earned but is not taxable as income because it is exempted by law or by treaty. a. Exclusion b. Inclusion

c. Deduction d. Taxation

ANS: A

2. First statement: Tax free income is not to be included in the income tax return unless information regarding it is specifically called for. While exclusions are simply not taken into account in determining gross income, deductions are subtracted from gross income to arrive at net income. Second statement:

a. Both statements are correct b. Both statements are incorrect c. Only the first statement is correct d. Only the second statement is correct ANS: A

3. First statement: Proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise are excluded from gross income. Second statement: If such amounts of the proceeds of life insurance are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income. a. Both statements are correct b. Both statements are incorrect c. Only the first statement is correct d. Only the second statement is correct ANS: A

4. The widow of your best friend has just been paid P 1,000,000 on account of the life insurance policy of the deceased husband. She asks you whether whethe r she shall declare de clare the amount for income inc ome tax purposes or for estate tax purposes. First advice: The

proceeds of the life insurance paid to the beneficiary upon the death of the insured are exempt from income tax and need not be declared for income tax purposes. Second statement: The proceeds of the life insurance will have to be declared for estate tax purposes if the designation of the beneficiary is revocable, otherwise, they need not be declared. a. Both advices are right b. First advice right; second advice wrong



c. Both advices are wrong d. First advice wrong; second advice right ANS: A

5. First statement: The amount received by the insured, as a return of premium paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in the contract or upon surrender of the contract shall be excluded from gross income. Second statement: If the amounts, when added to amounts received before the taxable year under such contract, exceed the aggregate premium paid, whether or not paid during the taxable year, then the excess shall be included in the gross income. a. Both statements are correct b. Only the first statement is correct c. Both statements are incorrect d. Only the second statement is correct ANS: A

6. Mr. Santiago purchased a life annuity for P 100,000 which would pay him P 10,000 a year. The life expectancy of Mr. Santiago was 12 years. Which of the following would Mr. Santiago be able to exclude from his gross income? a. P120, 000 c. P20,000 b. P100,000 d. P10,000 ANS: B

7. In 1999, Mr. S. Santos purchased a life insurance by paying P500,000 premiums. The insurance contract stipulated that Mr. Santos would receive P700,000 as annuity to be paid in three(3) years as follows: P200,000 in 2009, P200,000 in 2010 and P300,000 in 2011. How much would Mr. Santos exclude from his gross income in 2011? a. P200,000 c. P50,000 b. P100,000 d. None ANS: B

8. Jaypi Cruz insured his life with his estate as beneficiary. In 2011, after Mr. Cruz had paid P65,000 in premiums, he assigned the policy to Mr. S. Santos for P60,000 and Mr. Santos collected the total proceeds of P200,000. Mr. Santos, after the assignment, and before Mr. Cruz death, paid total premiums of P80,000. How much is the taxable amount? a. P200,000 b. P140,000

c. P60,000 d. Zero



ANS: C

9. First statement: The value of property acquired by gift, bequest, devise or descent shall be excluded from the gross income. Second statement: Income from property received as gift, bequest, devise or descent as well as gift, bequest, devise or descent of income from any property, in case of transfer of divided property, shall be included in gross income. a. Both statements are correct b. Both statements are incorrect c. Only the first statement is correct d. Only the second statement is correct ANS: A

10. One of the following is subject to income tax. a. Income from a donated property derived from its investment or sale b. Alimony or amount of principal paid under a marriage settlement c. Value of property received as gift, or under a will or testament, or through le gal succession d. Participating dividends in insurance ANS: A

11. Which of the following shall be excluded from gross income? a. Amounts received through accidents or health insurance b. Amounts received under Workmen’s Compensation Acts c. Amounts of any damages received, whether by suit or agreement, on account of injuries or sickness d. All of the choices ANS: D

12. Which of the following shall not be subject to tax? a. Moral damages b. Exemplary damages c. Compensatory damages d. All of the choices ANS: D

13. Recoveries of damages, representing compensation for personal injuries which are non physical in nature shall not be included in gross income if due to which of the following? a. Libel, defamation and slander b. Breach of promise to marry c. Compensatory damage d. All of the choices



ANS: D

14. Mr. Monte was injured in a vehicular accident in 2009. He incurred and paid medical expenses of P20,000 and legal fees of P10,000 during the year. In 2011, he received P70,000 as settlement from the insurance company which insured the car owned by the other party involved in the accident. From the above payments and transactions, the amount of taxable income of Mr. Monte in 2011 was: a. P70,000 c. P40,000 b. P50,000 d. zero ANS: D

15. In a certain civil case, Wilfredo, plaintiff, was awarded by the court P20,000 damages representing profit he failed to realize on account of defendant’s failure to comply with his obligation to Wilfredo. Are those damages taxable income of Wilfredo? a. No, because damages are generally not subject to income tax b. Yes, because damages which are excluded from gross income are only those that are paid arising from injuries or sickness c. No, because no criminal case was filed by Wilfredo d. Yes, because damages arising out of a civil case is always taxable under the current provisions of the Tax Code ANS: B

16. An accident solely attributable to the criminal negligence of the driver of Reckless Bus Company resulted in the death of Ricardo’s wife, physical injury to Ricardo that prevented him from working for a month and the total wreck of his brand new car which he bought for P400,000. In the action for damages filed by Ricardo against the bus company, the Court awarded the following: For Ricardo’s injury consisting mainly in the loss of his right arm For the loss of one-month salary For the death of his wife For moral damages on account of such loss For the loss of his car the value of which doubled because of inflation How much was the taxable income of Ricardo? a. P980,000 b. P425,000

P 30,000 25,000 25,000 100,000 800,000



c. P25,000 d. Zero ANS: B

17. One of the following is taxable in the Philippines a. Salaries of the officials of the United Nations assigned in the Philippines paid by the United nations and certified by the Secretary General of the United Nations b. Income of citizens of the United States working in consular offices in the Philippines c. Salaries of diplomatic officials and agents assigned in the Philippines d. Salaries of nonresident employed by a foreign petroleum service contractor in the Philippines ANS: D

18. Which of the following retirement benefits received from private firms is not taxable? a. Received from an employer under its reasonable pension plan, employee is 49 years old and has served the company for 12 years b. Received from an employer under its reasonable pension plan, employee is 51 years old and has served the company for 9 years c. Received from an employer which has no reasonable pension plan, employee is 53 years old and has served the company for 12 years d. Received from an employer under its reasonable pension plan, employee is 52 years old and has served the company for 11 years ANS: D

19. Retirement benefits received under R.A. No. 7641 and those received by officials and employees of private firms, whether individual or corporate, shall be excluded from gross income, provided that the following are satisfied, except that: a. the retirement benefit is in accordance with a reasonable private plan maintained by the employer approved by the BIR b. the retiring official or employee has been in the service of the same employer for at least ten (10) years and is not less than fifty (50) years of age at the time of retirement c. the retiring official or employee should not have previously availed of the privilege under the retirement benefit plan of the same or another employer d. none of the choices ANS: D

20. First statement: The law does not require that the 10-year requirement for tax exempt retirement benefits should be uninterrupted. Second statement: The tax exempt retirement benefits shall be availed of by the official or employee only once. a. Both statements are correct b. Both statements are incorrect c. Only the first statement is correct



d. Only the second statement is correct ANS: A

21. An employee of X company retired at the age of 50 years old after serving the company for 10 years. He received retirement benefits from X company amounting to P2,500,000. The following year after his retirement, he was invited by Y corporation to join it as its Executive Vice-President. After serving Y corporation for 10 years, he retired at the age of 61. Y corporation gave him P3,000,000 retirement benefits. Which retirement benefits should be subject to tax? a. Retirement benefits from X Company b. Retirement benefits from Y Corporation c. Both retirement benefits d. Neither retirement benefits ANS: B

22. Any amount received by an official or employee or by his heirs from the employer as consequence of separation of such official or employee from the service of the employer shall be excluded from gross income except if caused by: a. death b. sickness or other physical disability c. any cause beyond the control of the official or employee d. none of the choices ANS: D

23. RDE was retired by his employer corporation in 2010 and paid P1,000,000 as a retirement gratuity without any deduction for withholding tax. The corporation became bankrupt in 2011. Can the BIR subject the P1,000,000 retirement gratuity to income tax? Yes, if the retirement gratuity was paid based on a reasonable pension plan where RDE was 50 years old and has served the corporation for 8 years. Second answer: No, if RDE was forced by the corporation to retire a. Both answers are wrong b. Both answers are correct c. First answer is correct; second answer is wrong d. First answer is wrong; second answer is c orrect First answer:

ANS: B

24. Nellioso, 48 years of age and a retired employee, had among his properties and transactions at the end of the taxable year 2011: Retirement benefits in the amount of P 200,000 received by him in 2011 under a qualified retirement plan maintained by his former employer company. Nellioso voluntarily retired after 20 years of service.



Is the above item subject to the regular tax rates for individual taxpayers? a. No, because retirement benefits are generally not subject to the regular rates for individual taxpayers b. Yes, because Nellioso is only 48 years old when he retired which is below the 50 -year old requirement for exempt retirement benefits c. No, because the retirement benefits received by Nellioso are subject to final withholding tax d. Yes, because the retirement benefits are given when Nellioso voluntarily retired from the company ANS: B

25. Born of a poor family on February 14, 1963, Mario worked his way through college. After working for more than 12 years in X Manufacturing Company, Mario decided to retire and avail of the benefits under the very reasonable retirement plan maintained by his employer. On the day of his retirement on April 30, 2011 he received P400,000 as retirement benefit. Is Mario’s P400,000 retirement benefit subject to income tax? a. Yes, because Mario was only 48 years at the time of his retirement which is below the 50 year old requirement for exempt retirement benefits. b. No, because Mario worked for the company for 12 years and the retirement benefits are given under a very reasonable retirement plan maintained by his employer. c. Yes, because it was Mario who decide to retire and avail of the benefits under the very reasonable retirement plan maintained by his employer. d. No, because retirement benefits are not subject to income regardless of the age o the retiree ANS: A

26. Which of the following separation pay is taxable? a. Separation pay received by an employee who resigned to join another company b. Separation pay received by an employee whose services were terminated due to business reverses, the employee was 48 years at the time of termination c. Separation pay received by an employee who was asked by his employer to resign because his position was declared a redundancy d. Separation pay received by an employee who was retrenched by his employee because the latter is leaving the Philippines. ANS: A

27. First statement: In order for the separation pay to be exempt from income tax, the separation from the service of the official or employee must not be asked for or initiated by him or not of his own making. Second statement: Any payment made by an employer to an employee on account of dismissal, constitute of compensation regardless of whether the employer is legally bound by contract, statute, or otherwise to make such pa yment. a. Only the first statement is correct b. Only the second statement is correct



c. Both statements are correct d. Both statements are not correct ANS: C

28. Which of the following is not a condition for granting tax exemptions to employee be nefits? a. The employee is terminated from services of the employer due to death, sickness or other physical disability or for cause beyond the control of the employee b. The employer pays benefits the official or employee or his heirs as a consequence of such separation c. The employee has served the employer for at least ten(10) years d. None of the choices ANS: C

29. Which of the following shall not be subject to income tax? I- Pedro Reyes, an official of Corporation X, asked for “early retirement” because he was emigrating from Australia. He was paid P2,000,000 as a separation pay in recognition of his valuable services to the corporation. II- Juan Cruz, another official of the same company was separated for occupying a redundant position. He was given P500,000 as a separation pay. III- Jose Bautista was separated due to his failing eyesight. He was given P500,000 as separation pay. All of the three(3) were not qualified to retire under the BIR approved pension plan of the corporation a. I, II and III c. I only b. I and II d. II and III only

ANS: D

30. Mr. Jacobo worked for a manufacturing firm. Due to business reverses, the firm offered a voluntary redundancy program in order to reduce overhead expenses. Under the program, an employee who offered to resign would be given separation pay equivalent to his three month’s basic salary for every year of service. Mr. Jacobo accepted the offer an received P400,000 as separation pay under the program. After all the employee who accepted the offer were paid, the firm found its overhead still excessive. Hence, it adopted another redundancy program. Various unprofitable departments were closed. As a result Mr. Kintanar was separated from his service. He also received P400,000 as separation pay. Which of the above separation pay must be exempt from tax? a. Both separation pays are exempt from tax b. Neither separation pay is exempt from tax c. Only the separation pay of Mr. Jacobo is exempt d. Only the separation pay of Mr. Kintanar is exempt



ANS: D

31. Which of the following shall be excluded from gross income? a. Social security benefits, retirement gratuities, pensions and other similar benefits received from foreign government agencies and other institutions, private and public by resident or nonresident citizens of the Philippines or aliens who come to reside permanently in the Philippines b. United States Veterans Administration benefits c. GSIS and SSS benefits d. All of the choices ANS: D

32. Which of the following incomes derived by foreign governments, financing institutions owned, controlled or enjoying refinancing from foreign governments and international or regional financial institutions established by foreign governments shall be excluded from gross income? I- Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities II- Income from interest on deposits in banks in the Philippines a. Both I and II c. I only b. Neither I nor II d. II only ANS: A

33. First Statement: Generally, the income of government entities performing proprietary function is subject to tax. Second Statement: Income derived from any public utility or from the exercise of any essential governmental accruing to the Government of the Philippines or to any political subdivision is not taxable a. True, True c. True, False b. False, False d. False, True ANS: A

34. Prizes and awards made primarily in religious, charitable, scientific, educational, artistic, literary, or civic achievement, shall be excluded from gross income, but only if the recipient: I- is selected without any action on his part to enter the contest or proceeding II- is not required to render substantial future services as a condition to receiving such prize or award a. Both I and II are correct c. Only I is correct b. Neither I nor II is correct d. Only II is correct ANS: A

35. Ms. Elisya Montenegro entered her short story in a literary contest. She won in the Short



Story category, and received P500,000 for her prize. What was the tax consequence of the literary prize? a. Exempt from income tax b. Subject to final withholding tax c. Subject to Section 24 (A) d. Not subject to any internal revenue tax ANS: B

36. Ms. Ma. Estella Santos was selected as the outstanding scientist in her province in 2011. Her name was submitted by her supervisor without her knowledge. She received a plaque, trophy and cash reward of P500,000. What was the tax consequence of the reward? a. Exempt from income tax b. Subject to final withholding tax c. Subject to Section 24 (A) d. Not subject to any internal revenue tax ANS: A

37. All prizes and awards granted to athletes in local and international sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national sports associations shall be: a. Exempt from income tax b. Subject to final withholding tax c. Subject to Section 24 (A) d. None of the choices ANS: A

38. Conrad “Smooth” Ube is an amateur boxer. He is sent to compete in South Korea by the Amateur Boxing Association of the Philippines (ABAP) and wins the gold medal after beating his opponent Oh Ke Ba. He is awarded P500,000 by Good Faith Corp., a domestic Philippine corporation. What is the tax consequence of the award received by Conrad “Smooth” Ube? a. Subject to Section 24 (A) b. Subject to final tax c. Not subject to income tax d. Subject to amusement tax ANS: C

39. Bon “Boom Boom” Bonafe, resident citizen is a professional boxer. He fights Antonio “Speedy” Dayag in the world championship in the USA. He receives P15,000,000 prize for the fight. What is the tax consequence of the prize received by Bon “Boom Boom” Bonafe? a. Subject to Section 24 (A) b. Subject to final tax c. Not subject to income tax



d. Subject to amusement tax ANS: A

40. Gross benefits received by officials and employees of public and private entities are excluded from gross income provided that the total exclusion shall not exceed: a. P100,000 b.P50,000 c. P30,000 d. P20,000 ANS: C

41. Which of the following shall not be included in the gross income? a. GSIS and SSS contributions b. Medicare and Pag-IBIG contributions c. Union dues d. All of the choices ANS: D

42. Which of the following gains should be excluded from gross income? I- Gains realized from the sale or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five(5) years. II- Gains realized by the investor upon redemption of shares of stock of a mutual fund company a. Both I and II c. I only b. Neither I nor II d. II only ANS: A

43. The amount of the informer’s reward shall be equivalent to: a. ten percent (10%) of the amount recovered or one million pesos (P1,000,000) per case whichever is higher b. ten percent (10%) of the amount recovered or one million pesos (P1,000,000) per case whichever is lower c. fifteen percent (15%) of the amount recovered d. none of the choices ANS: B

44. Informer’s reward to persons instrumental in the discovery of violations of the National Internal Revenue Code and the discovery and seizure of smuggled goods is subject to a final withholding tax of: a. ten percent (10%) b. fifteen percent (15%)



c. twenty percent (20%) d. twenty five percent (25%) ANS: A

45. Which of the following is subject to tax? a. Interest on government securities b. Interest on long term deposits or investments in banks with a maturity of five (5) years or more c. Interest on the price of the land covered by the Presidential Decrees on Land Reform, received by the landowner from the purchaser-tenant, and the capital gain derived by him d. Interest received by nonresidents from deposits with depository banks under the Expanded Foreign Currency Deposit System (EFCDS) ANS: A

46. Which of the following statements regarding campaign contributions is correct? a. As a general rule, campaign contributions are not included in the taxable income in the candidate to whom they were given, the reason being that such contributions were given not for the personal expenditure/ enrichment of the concerned candidate, but for the purpose of utilizing such contributions for his/her campaign b. To be considered as exempt from income tax, these campaign contributions must have been utilized to cover a candidate’s expenditures for his/her electoral campaign c. Unutilized/ excess campaign funds, that is, campaign contributions net of the candidate’s campaign expenditures, shall be considered as subject to income tax, and as such, must be included in the candidate’s taxable income as stated in his/her Income Tax Return filed for the subject taxable year d. All of the choices

Chapter 6 Exclusions from Gross Income.pdf

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