Tax Law

T ABLE OF CONTENTS I. General Principles of Taxation……………………………………………………………………………………………………. 1 A. B. C. D.

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I.

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Definition and concept of taxation……………………………………………………………………………………………………………………….... 1 Nature of taxation ………………………………………………………………………………………………………….... ........................................1 Characteristics Characteristics of taxation ………………………………………………………………………………………………………….... ..........................2 Power of taxation compared with other o ther powers ……………………………………………………………………..…… .……..…....3 1. Police power………………………………………………………………………………………………………….... ..........................................3 2. Power of eminent domain………………………………………………………………………………………………………………………………… 3 Purpose of taxation………………………………………………………………………………………………………….... ......................................3 3. Revenue-raising………………………………………………………………………………………………………….... ....................................3 4. Non-revenue/special Non-revenue/special or regulatory………………………………………………………………………………………………………….... .....3 Principles of sound tax system ………………………………………………………………………………………………………….... ...................3 1. Fiscal adequacy…………………………………………………………………………………………………………......................... ................3 2. Administrative feasibility …………………………………………………………………………………………………………......................... 3 3. Theoretical justice…………………………………………………………………………………………………………......................... ............4 Theory and basis of taxation………………………………………………………………………………………………………….................. .........4 1. Lifeblood theory…………………………………………………………………………………………………………......................... ...............4 2. Necessity theory …………………………………………………………………………………………………………......................... ..............4 3. Benefits-protection Benefits-protection theory (Symbiotic relationship) …………………………………………………………………………………….. 4 4. Jurisdiction over subject and objects………………………………………………………………………………………………………………. 4 Doctrines in taxation …………………………………………………………………………………………………………......................... ..............4 1. Prospectivity of tax laws …………………………………………………………………………………………………………..................... ......4 2. Imprescriptibility…………………………………………………………………………………………………………......................... .............4 3. Double taxation…………………………………………………………………………………………………………......................... ................4 4. Escape from taxation…………………………………………………………………………………………………………......................... .......6 5. Exemption from taxation ……………………………………………………………………………………………………… ..…........................9 6. Compensation and set-off ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… ..….... ...................9 7. Compromise…………………………………………………………………………………………………………......................... ...................12 8. Tax amnesty…………………………………………………………………………………………………………......................... ...................12 9. Construction and interpretation interpretation………………………………………………………………………………………………………….... ........12 Scope and limitation of taxation ………………………………………………………………………………………………………….... ...............14 1. Inherent limitations …………………………………………………………………………………………………………........................ ........14 2. Constitutional limitations………………………………………………………………………………………………………….... ...................19 Stages of taxation…………………………………………………………………………………………………………......................... ..................32 1. Levy…………………………………………………………………………………………………………......................... ...................... .................................32 ...........32 2. Assessment and collection………………………………………………………………………………………………………….... .................32 3. Payment …………………………………………………………………………………………………………......................... …………………………………………………………………………………………………………......................... ..........................33 4. Refund…………………………………………………………………………………………………………......................... .............................33

K. Definition, nature, and characteristics of taxes……………………………………………………………………………………………………… .33 L. Requisites of a valid tax…………………………………………………………………………………………………………......................... ..........33 M. Tax as distinguished from other forms of exactions ………………………………………………………………………………………………. 33 N. Kinds of taxes …………………………………………………………………………………………………………......................... .........................33

II. National Internal Revenue Code (NIRC) of 1997, as amended A. Income taxation …………………………………………………………………………………………………………......................... ....................34 1. Income tax systems …………………………………………………………………………………………………………......................... ........34 2. Features of the Philippine income tax law …………………………………………………………………………………………………….. 36 i

3. Criteria in imposing Philippine income tax …………………………………………………………………………………………………… 36 4. Types of Philippine income tax ………………………………………………………………………………………………………….... ..........38 5. Taxable period…………………………………………………………………………………………………………......................... ................39 6. Kinds of taxpayers…………………………………………………………………………………………………………......................... ..........39 7. Income taxation …………………………………………………………………………………………………………......................... ..............42 8. Income…………………………………………………………………………………………………………......................... ............................43 9. Gross income…………………………………………………………………………………………………………......................... ..................46 10. Taxation of resident citizens, non-resident citizens, and resident aliens …………………………………………………. 106 11. Taxation of non-resident aliens engaged in trade or business………………………………………………………………….. 119 12. Individual taxpayers exempt from income tax …………………………………………………………………………………………… 120 13. Taxation of domestic corporations ………………………………………………………………………………………………………….... .120 14. Taxation of resident foreign corporations …………………………………………………………………………………………………. 126 15. Taxation of non-resident foreign corporations………………………………………………………………………………………….. 127 16. Improperly accumulated earnings of corporations…………………………………………………………………………………… 127 17. Exemption from tax on corporations …………………………………………………………………………………………………………. 127 18. Taxation of partnerships ………………………………………………………………………………………………………….... .................127 19. Taxation of general professional partnerships partnerships ………………………………………………………………………………………… ..127 20. Withholding tax…………………………………………………………………………………………………………......................... ...........127 B.  Estate tax…………………………………………………………………………………………………………......................... .............................133 1. Basic principles …………………………………………………………………………………………………………......................... ...........133 2. Definition…………………………………………………………………………………………………………......................... ....................133 3. Nature …………………………………………………………………………………………………………......................... ..........................133 4. Purpose or object …………………………………………………………………………………………………………......................... …………………………………………………………………………………………………………......................... .......133 5. Time and transfer of properties properties ………………………………………………………………………………………………………….... .....133 6. Classification of decedent ………………………………………………………………………………………………………….... ………………………………………………………………………………………………………….... ...............134 7. Gross estate vis-à-vis net estate………………………………………………………………………………………………………….... ......134 8. Determination Determination of gross estate and net estate …………………………………………………………………………………………… .134 9. Composition of gross estate………………………………………………………………………………………………………….... ............136 10. Items to be included in gross estate…………………………………………………………………………………………………………. .137 11. Deductions from estate………………………………………………………………………………………………………….... ..................138 12. Exclusions from estate………………………………………………………………………………………………………….... ...................141 13. Tax credit for estate taxes paid in a foreign country ………………………………………………………………………………… 141 14. Exemption of certain acquisitions and transmissions ……………………………………………………………………………… 141 15. Filing of notice of death………………………………………………………………………………………………………….... .................141 16. Estate tax return …………………………………………………………………………………………………………......................... ........141 C. Donor’s tax…………………………………………………………………………………………………………......................... ..........................144 1. Basic principles ………………………………………………………………………………………………………….... ................................144 2. Definition…………………………………………………………………………………………………………......................... ....................144 3. Nature …………………………………………………………………………………………………………......................... ..........................144 4. Purpose or object …………………………………………………………………………………………………………......................... …………………………………………………………………………………………………………......................... .......144 5. Requisites of valid donation………………………………………………………………………………………………………….... ...........144 6. Transfers which may be constituted as donation ……………………………………………………………………………………… 144 7. Transfer for less than adequate and full consideration…………………………………………………………………………….. 146 8. Classification of donor…………………………………………………………………………………………………………......................... 147 9. Determination Determination of gross gift ………………………………………………………………………………………………………….... ………………………………………………………………………………………………………….... .............147 10. Composition of gross gift ………………………………………………………………………………………………………….... ………………………………………………………………………………………………………….... ...............147 11. Valuation of gifts made in property ………………………………………………………………………………………………………… .148 12. Tax credit for donor’s taxes paid in a foreign country……………………………………………………………………………… 149 13. Exemptions of gifts from donor’s tax ………………………………………………………………………………………………………… 149 14. Person liable…………………………………………………………………………………………………………......................... ..............151 ii

3. Criteria in imposing Philippine income tax …………………………………………………………………………………………………… 36 4. Types of Philippine income tax ………………………………………………………………………………………………………….... ..........38 5. Taxable period…………………………………………………………………………………………………………......................... ................39 6. Kinds of taxpayers…………………………………………………………………………………………………………......................... ..........39 7. Income taxation …………………………………………………………………………………………………………......................... ..............42 8. Income…………………………………………………………………………………………………………......................... ............................43 9. Gross income…………………………………………………………………………………………………………......................... ..................46 10. Taxation of resident citizens, non-resident citizens, and resident aliens …………………………………………………. 106 11. Taxation of non-resident aliens engaged in trade or business………………………………………………………………….. 119 12. Individual taxpayers exempt from income tax …………………………………………………………………………………………… 120 13. Taxation of domestic corporations ………………………………………………………………………………………………………….... .120 14. Taxation of resident foreign corporations …………………………………………………………………………………………………. 126 15. Taxation of non-resident foreign corporations………………………………………………………………………………………….. 127 16. Improperly accumulated earnings of corporations…………………………………………………………………………………… 127 17. Exemption from tax on corporations …………………………………………………………………………………………………………. 127 18. Taxation of partnerships ………………………………………………………………………………………………………….... .................127 19. Taxation of general professional partnerships partnerships ………………………………………………………………………………………… ..127 20. Withholding tax…………………………………………………………………………………………………………......................... ...........127 B.  Estate tax…………………………………………………………………………………………………………......................... .............................133 1. Basic principles …………………………………………………………………………………………………………......................... ...........133 2. Definition…………………………………………………………………………………………………………......................... ....................133 3. Nature …………………………………………………………………………………………………………......................... ..........................133 4. Purpose or object …………………………………………………………………………………………………………......................... …………………………………………………………………………………………………………......................... .......133 5. Time and transfer of properties properties ………………………………………………………………………………………………………….... .....133 6. Classification of decedent ………………………………………………………………………………………………………….... ………………………………………………………………………………………………………….... ...............134 7. Gross estate vis-à-vis net estate………………………………………………………………………………………………………….... ......134 8. Determination Determination of gross estate and net estate …………………………………………………………………………………………… .134 9. Composition of gross estate………………………………………………………………………………………………………….... ............136 10. Items to be included in gross estate…………………………………………………………………………………………………………. .137 11. Deductions from estate………………………………………………………………………………………………………….... ..................138 12. Exclusions from estate………………………………………………………………………………………………………….... ...................141 13. Tax credit for estate taxes paid in a foreign country ………………………………………………………………………………… 141 14. Exemption of certain acquisitions and transmissions ……………………………………………………………………………… 141 15. Filing of notice of death………………………………………………………………………………………………………….... .................141 16. Estate tax return …………………………………………………………………………………………………………......................... ........141 C. Donor’s tax…………………………………………………………………………………………………………......................... ..........................144 1. Basic principles ………………………………………………………………………………………………………….... ................................144 2. Definition…………………………………………………………………………………………………………......................... ....................144 3. Nature …………………………………………………………………………………………………………......................... ..........................144 4. Purpose or object …………………………………………………………………………………………………………......................... …………………………………………………………………………………………………………......................... .......144 5. Requisites of valid donation………………………………………………………………………………………………………….... ...........144 6. Transfers which may be constituted as donation ……………………………………………………………………………………… 144 7. Transfer for less than adequate and full consideration…………………………………………………………………………….. 146 8. Classification of donor…………………………………………………………………………………………………………......................... 147 9. Determination Determination of gross gift ………………………………………………………………………………………………………….... ………………………………………………………………………………………………………….... .............147 10. Composition of gross gift ………………………………………………………………………………………………………….... ………………………………………………………………………………………………………….... ...............147 11. Valuation of gifts made in property ………………………………………………………………………………………………………… .148 12. Tax credit for donor’s taxes paid in a foreign country……………………………………………………………………………… 149 13. Exemptions of gifts from donor’s tax ………………………………………………………………………………………………………… 149 14. Person liable…………………………………………………………………………………………………………......................... ..............151 ii

15. Tax basis…………………………………………………………………………………………………………......................... ....................151 D. Value-Added Tax (VAT) …………………………………………………………………………………………………………......................... .....153 1. Concept …………………………………………………………………………………………………………......................... …………………………………………………………………………………………………………......................... ......................153 2. Characteristics/Elements Characteristics/Elements of a VAT-Taxable transaction …………………………………………………………………………. 153 3. Impact of tax…………………………………………………………………………………………………………......................... ..............154 4. Incidence of tax …………………………………………………………………………………………………………......................... .........154 5. Tax credit method…………………………………………………………………………………………………………......................... .....154 6. Destination principle …………………………………………………………………………………………………………......................... 154 7. Persons liable…………………………………………………………………………………………………………......................... ............154 8. VAT on sale of goods or properties…………………………………………………………………………………………………………. .155 9. Zero-rated and effectively zero-rated sales of goods or properties ………………………………………………………. 156 10. Transactions deemed sale………………………………………………………………………………………………………….... ............156 11. Change or cessation of status as VAT-registered person……………………………………………………………………….. 157 12. VAT on importation of goods………………………………………………………………………………………………………….... .......157 13. VAT on sale of service and use or lease of properties…………………………………………………………………………… ..158 14. Zero-rated sale of services………………………………………………………………………………………………………….... ...........159 15. VAT exempt transactions ………………………………………………………………………………………………………….... .............159 16. Input tax and output tax, defined ………………………………………………………………………………………………………….... 161 17. Sources of input tax …………………………………………………………………………………………………………......................... .161 18. Persons who can avail of input tax credit ……………………………………………………………………………………………….. ……………………………………………………………………………………………….. 161 19. Determination Determination of output/input tax; VAT payable; excess input tax credits ……………………………………………161 20. Substantiation Substantiation of input tax credits ………………………………………………………………………………………………………….. 161 21. Refund or tax credit of excess input tax………………………………………………………………………………………………….. 161 22. Invoicing requirements ………………………………………………………………………………………………………….... ................161 23. Filing of return and payment ………………………………………………………………………………………………………….... ………………………………………………………………………………………………………….... .......161 24. Withholding of final VAT on sales to government  ……………………………………………………………………………… ..161 E. Tax remedies under the NIRC………………………………………………………………………………………………………….... ....................161 1. Taxpayer’s remedies…………………………………………………………………………………………………………......................... .161 2. Government remedies………………………………………………………………………………………………………….... ...................192 3. Statutory offenses and penalties penalties………………………………………………………………………………………………………….... ...193 4. Compromise and abatement of taxes……………………………………………………………………………………………………….. 194 F. Organization and Function of the Bureau of Internal Revenue……………………………………………………………………………… 196 1. Rule-making authority of the Secretary of Finance……………………………………………………………………………………. 196 2. Power of the Commissioner to suspend the business operation of a taxpayer………………………………………….. 197

III. Local Government Code of 1991, as amended ……………………………………………………………………… 197 A. Local government taxation…………………………………………………………………………………………………………......................... ..197 1. Fundamental principles………………………………………………………………………………………………………….... .................197 2. Nature and source of taxing power…………………………………………………………………………………………………………… 197 3. Local taxing authority………………………………………………………………………………………………………….... ....................199 4. Scope of taxing power………………………………………………………………………………………………………….... ...................200 5. Specific taxing power of Local Government Units……………………………………………………………………………………… 200 6. Common limitations on the taxing powers of LGUs…………………………………………………………………………………… 203 7. Collection of business tax………………………………………………………………………………………………………….... ..............204 8. Taxpayer’s remedies…………………………………………………………………………………………………………......................... .205 1. Judicial…………………………………………………………………………………………………………......................... ................205 2. Administrative…………………………………………………………………………………………………………......................... ....205 9. Civil remedies by the LGU for collection of revenues…………………………………………………………………………… 206 iii

B. Real property property taxation taxation…………………………………………………………………………………………………………......................... .........207 1. Fundamental principles………………………………………………………………………………………………………….... .................207 2. Nature of real property tax………………………………………………………………………………………………………….... ............207 3. Imposition of real property tax………………………………………………………………………………………………………….... ......207 4. Appraisal and assessment of real property tax………………………………………………………………………………………… ..212 5. Collection of real property tax………………………………………………………………………………………………………….... .......214 6. Refund or credit of real property tax………………………………………………………………………………………………………… .215 7. Taxpayer’s remedies…………………………………………………………………………………………………………......................... .216

IV. Tariff and Customs Code of 1978, as amended ……………………………………………………………………… 217 A. Tariff and duties, defined…………………………………………………………………………………………………………......................... .....217 B. General rule: all imported articles are subject subject to duty. ………………………………………………………………………………………… 217 1. Importation by the government taxable…………………………………………………………………………………………………… .217 C. Purpose for for imposition imposition…………………………………………………………………………………………………………......................... .........217 D. Flexible tariff clause…………………………………………………………………………………………………………......................... .............217 E. Requirements of importation………………………………………………………………………………………………………….... ...................218 1. Beginning and ending of importation………………………………………………………………………………………………………… 218 2. Obligations of importer importer………………………………………………………………………………………………………….... .................218 F. Importation in violation of tax credit certificate…………………………………………………………………………………………………… 219 1. Smuggling…………………………………………………………………………………………………………......................... ..................219 2. Other fraudulent fraudulent practices………………………………………………………………………………………………………….... ............219 G. Classification of goods…………………………………………………………………………………………………………......................... ..........219 1. Taxable importation…………………………………………………………………………………………………………......................... ..219 2. Prohibited importation………………………………………………………………………………………………………….... ..................220 3. Conditionally-free importation ………………………………………………………………………………………………………….... ......220 H. Classification of duties ………………………………………………………………………………………………………….................... ..............221 1. Ordinary/regular duties………………………………………………………………………………………………………….... .................221 2. Special duties…………………………………………………………………………………………………………......................... ............221 I. Remedies…………………………………………………………………………………………………………......................... ..................... ..............................223 .........223 1. Government…………………………………………………………………………………………………………......................... ..............223 2. Taxpayer…………………………………………………………………………………………………………......................... ...................229

V. Judicial Remedies (R.A. No. 1125, as amended, and the Revised Rules of the CTA) …………………231 1. Jurisdiction of the Court of Tax Appeals………………………………………………………………………………………………………….... ....231 2. Judicial procedures…………………………………………………………………………………………………………......................... ...............235 3. Taxpayer’s suit impugning the validity of tax measures or acts o f taxing authorities ………………………………………….. 244

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TAXATION LAW General Principles of Taxation A. Definition and concept of taxation I.

1. Describe the power of taxation. May a legislative body enact laws to raise revenues in the absence of a constitutional provision granting said body the power of tax? Explain. SUGGESTED ANSWER: The power of taxation is inherent in the State being an attribute of sovereignty. As an incident of sovereignty, the power to tax has been described as unlimited in its range, acknowledging in its very nature no limits, so that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax on the constituency who are to pay it. [Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667, (1996)]. Being an inherent power, the legislature can enact laws to raise revenues even without the grant of said power in the Constitution. It must be noted that Constitutional provisions relating to the power of taxation do not operate as grants of the power of taxation to the Government, but instead merely constitute limitations upon a power which would otherwise be practically without limit. [Cooley, Constitutional Limitations, 1927 8th Ed., p. 787] (BAR 2005) B. Nature of taxation 1. Taxes are assessed for the purpose of generating revenue to be used for public needs. Taxation itself is the power by which the State raises revenue to defray the expenses of government. A jurist said that a tax is what we pay for civilization. In our jurisdictions, which of the following statements may be erroneous: 1. 2. 3. 4. 5.

Taxes are pecuniary in nature. Taxes are enforced charges and contributions. Taxes are imposed on persons and property within the territorial jurisdiction of a State. Taxes are levied by the executive branch of the government. Taxes are assessed according to a reasonable rule of apportionment.

Justify your answer or choice briefly. (5%) SUGGESTED ANSWER: 4. Taxes are levied by the executive branch of government. This statement is erroneous because levy refers to the act of imposition by the legislature which is done through the enactment of a tax law. Levy is an exercise of the power to tax which is exclusively legislative in nature and character. Clearly, taxes are not levied by the executive branch of government. (NPC v. Albay, 186 SCRA 198 (1990). (BAR 2004) 2. Why is the power to tax considered inherent in a sovereign State? SUGGESTED ANSWER: It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this power no sovereign State can exist or endure. The power to tax proceeds upon the theory that the existence of a government is a necessity and this power is an essential and inherent attribute of sovereignty, belonging as a matter of right to every independent state or government. No sovereign state can continue to exist without the Page | 1

means to pay its expenses; and that for those means, it has the right to compel all citizens and property within its limits to contribute, hence, the emergence of the power to tax. (51 Am. Jur., Taxation 40). (BAR 2003) 3. Justice Holmes once said: “The power to tax is not the power to destroy while this Court (the Supreme Court) sits." Describe the power to tax and its limitations. (5%) SUGGESTED ANSWER: The power to tax is an inherent power of the sovereign which is exercised through the legislature, to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. The underlying basis for its exercise is governmental necessity for without it no government can exist nor endure. Accordingly, 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. The 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 Court's role to see to it that the exercise of the power does not transgress these limitations. (BAR 2001) 4. What is the nature of the power of taxation?  ANSWER: The power to tax is an attribute of sovereignty and is inherent in the State. It is a power emanating from necessity because it imposes a necessary burde n to preserve the State’s sovereignty (PhiL Guarantee Co. vs. Commissioner, L-22074, April 30, 1965). It is inherently legislative in nature and character in that the power of taxation can only be exercised through the enactment of law.  ALTERNATIVE ANSWER: The nature of the power of taxation refers to its own limitations such as the requirement that it should be for a public purpose that it be legislative, that it is territorial and that it should be subject to international comity. (BAR 1996) C. Characteristics of taxation 1. Taxes are assessed for the purpose of generating revenue to be used for public needs. Taxation itself is the power by which the State raises revenue to defray the expenses of government. A jurist said that a tax is what we pay for civilization. In our jurisdictions, which of the following statements may be erroneous? 1. 2. 3. 4. 5.

Taxes are pecuniary in nature. Taxes are enforced charges and contributions. Taxes are imposed on persons and property within the territorial jurisdiction of a State. Taxes are levied by the executive branch of the government. Taxes are assessed according to a reasonable rule of apportionment.

Justify your answer or choice briefly. (5%) SUGGESTED ANSWER: 4. Taxes are levied by the executive branch of government. This statement is erroneous because levy refers to the act of imposition by the legislature which is done through the enactment of a tax law. Levy is an exercise of the power to tax which is exclusively legislative in nature and character. Clearly, taxes are not levied by the executive branch of government. (NPC v. Albay, 186 SCRA 198 (1990). (BAR 2004)

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D. Power of taxation compared with other powers 1. Police power 2. Power of eminent domain E. Purpose of taxation 3. Revenue-raising 4. Non-revenue/special or regulatory 1. The police power, the power to tax and the power of eminent domain are inherent powers of government. May a tax be validly imposed in the exercise of the police power and not of the power to tax? If your answer is in the affirmative, give an example.  ANSWER: The police power may be exercised for the purpose of requiring licenses for which license fees may have to be paid. The amount of the license fees for the regulation of useful occupations should only be sufficient to pay for the cost of the license and the necessary expense of police surveillance and regulation. For non-useful occupations, the license fee may be sufficiently high to discourage the particular activity sought to be regulated. It is clear from the foregoing that police power may not be exercised by itself alone for the purpose of raising taxes. However, police power may be exercised jointly with the power of taxation for the purpose of raising revenues. (Lutz us. Araneta, 98 Phil. 148)  ALTERNATIVE ANSWER: Taxation involves the power to raise revenue not only in order to support the existence of government but likewise to carry out legitimate objects of government. Among such legitimate objects are those that police power itself can cover. As early as the case of Lutz vs. Araneta (98 Phil. 148), the Supreme Court has ruled that taxation may be used to implement an object of police power. An illustration of such exercise would be an imposition of taxes on gambling, the rates of which are made somewhat onerous in order to discourage gambling instead of an outright prohibition thereof by an exercise of a police power measure such as by present provisions of the Revised Penal Code. (BAR 1991) 2. To provide means for rehabilitation and stabilization of the sugar industry so as to prepare it for the eventuality of the loss of the quota allocated to the Philippines resulting from the lifting of U.S. sanctions against an African country. Congress passes a law increasing the existing tax on the manufacture of sugar on a graduated basis. All collections made under the law are to accrue to a special fund to be spent only for the purposes enumerated therein, among which are to place the sugar industry in a position to maintain itself and ultimately to insure its continued existence despite the loss of that quota, and to afford laborers employed in the industry a living wage and to improve their working conditions. X, a sugar planter, files a suit questioning the constitutionality of the law alleging that the tax is not for a public purpose as the same is being levied exclusively for the aid and support of the sugar industry. Decide the case.  ANSWER: The suit filed by the sugar planter questioning the constitutionality of the sugar industry stabilization measure is untenable. Taxation is no longer merely for raising revenue to support the existence of government but the power may also be exercised to carry out legitimate objects of the government. It is a legitimate object of government to protect its local industries on which the national economy largely depends. Where the aim of the tax measure is to achieve such a governmental objective, the tax Imposition can be said to be for a public purpose (Gaston vs. Republic Bank, 158 SCRA 626). (BAR 1991) F. Principles of sound tax system 1. Fiscal adequacy 2. Administrative feasibility 1.  A law that allows taxes to be paid either in cash or in kind is valid. Page | 3

SUGGESTED ANSWER: True. There is no law which requires the payment of taxes in cash only. However, a law allowing payment of taxes in kind, although valid, may pose problems of valuation, hence, will violate the principle of administrative feasibility. (BAR 2009) Theoretical justice G. Theory and basis of taxation 1. Lifeblood theory 3.

1. Discuss the meaning and the implications of the following statement: “Taxes are the lifeblood of government and their prompt and certain availability is an imperi ous need."

 ANSWER: The phrase, “taxes are the lifeblood of government, etc." expresses the underlying basis of taxation w hich is governmental necessity, for indeed, without taxation, a government can neither exists nor endure. Taxation is the indispensable and inevitable price for civilized society: without taxes, the government would be paralyzed. This phrase has been used, for instance, to justify the validity of the laws providing for summary remedies in the collection of taxes. As a consequence of the above rule, an injunction against the assessment and collection of taxes is generally withheld be the laws imposing such taxes. Even when it is not so, under procedural laws such an injunction may not be obtained as held in the case of Valley Trading Co. vs. CFI (G.R. No. 49529, 31 March 1989), where the Supreme Court ruled that the damages that may be caused to the taxpayer by being made to pay the taxes cannot be said to be as irreparable as it would be against the government’s inability to collect taxes. (BAR 1991) 2. 3. 4.

Necessity theory Benefits-protection theory (Symbiotic relationship) Jurisdiction over subject and objects

H. Doctrines in taxation 1. Prospectivity of tax laws 2. Imprescriptibility 3. Double taxation 1. Is double taxation a valid defense against the legality of a tax measure?  ANSWER: No. double taxation standing alone and not being forbidden by our fundamental law is not a valid defense against the legality of a tax measure (Pepsi Cola v. Tanawan 69 SCRA 460). However, if double taxation amounts to a direct duplicate taxation, in that the same subject 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 jurisdiction or taxing district, for the same taxable period and for the same kind or character of a tax, then it becomes legally objectionable for being oppressive and inequitable. (BAR 1997) 2. X, a lessor of a property, pays real estate tax on the premises, a real est ate dealer’s tax based on rental receipts and income tax on the rentals. X claims that this is double taxation. Decide.  ANSWER: There is no double taxation. Double taxation 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 kind or character of tax. The real estate tax is a tax on property; the real estate dealer’s tax is a tax on the privilege to engage in business; while the income tax is a tax on the privilege to earn an income. These taxes are Page | 4

imposed by different taxing authorities and are essentially of different kind and character [Villanueva vs. City of Iloilo, 26 SCRA 578). (BAR 1996) a. Strict sense b.Broad sense 1.  A municipality, BB, has an ordinance which requires that all stores, restaurants, and other establishments selling liquor should pay a fixed annual fee of P20.000. Subsequently, the municipal board proposed an ordinance imposing a sales tax equivalent to 5% of the amount paid for the purchase or consumption of liquor in stores, restaurants and other establishments. The municipal mayor, CC, refused to sign the ordinance on the ground that it would constitute double taxation. Is the refusal of the mayor justified? Reason briefly. (5%) SUGGESTED ANSWER: No. The refusal of the mayor is not justified. The impositions are of different nature and character. The fixed annual fee is in the nature of a license fee imposed through the exercise of police power while the 5% tax on purchase or consumption is a local tax imposed through the exercise of taxing powers. Both 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 (Compania General de Tabacos de Filipinos v. City of Manila, 8 SCRA 367 367 [1963]). (BAR 2004) 2. When an item of Income is taxed In the Philippines and the same Income Is taxed in another country, is there a case of double taxation?  ANSWER: Yes, but it is only a case of indirect duplicate taxation which is not legally prohibited because the taxes are imposed by different taxing authorities. (BAR 1997) c. Constitutionality of double taxation d.Modes of eliminating double taxation 1. In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.-based corporation which owns a chain of Filipino restaurants in the West Coast, U.S.A. The dividend remitted to Caruso is subject to U.S. withholding tax with respect to a non-resident alien like Caruso.  A.

What will be your advice to Caruso in order to lessen the impact of possible double taxation on the same income? (3%)

SUGGESTED ANSWER: Caruso has the option either to claim the amount of income tax withheld in U.S. as a deduction from his gross income in the Philippines, or to claim it as a tax credit (Sec. 34(C)(1)(b), NIRC). B.

Would your answer in A. be the same if Caruso became a U.S. immigrant in 2008 and had become a non-resident Filipino citizen? Explain the difference in treatment for Philippine income tax purposes. (3%)

SUGGESTED ANSWER: No. The income from abroad of a non-resident citizen is exempt from the Philippine income tax; hence, there is no international double taxation on said income (Sec. 23, NIRC). 2. What are the usual methods of avoiding the occurrence of double taxation?  ANSWER: Page | 5

The usual methods of avoiding the occurrence of double taxation are: 1. 2. 3. 4.

Allowing reciprocal exemption either by law or by treaty; Allowance of tax credit for foreign taxes paid; Allowance of deduction for foreign taxes paid; and Reduction of the Philippine tax rate. (BAR 1997)

4.

Escape from taxation a. Shifting of tax burden

1. What is tax pyramiding? What is its basis in law? 5% SUGGESTED ANSWER: Tax pyramiding refers to the imposition of a tax upon a tax. This occurs when the tax is added as part of the tax base. It has no basis in law (People v. Sandiganbayan, 467 SCRA 137 [2005]; CIR v. American Rubber Co., 18 SCRA 842 [1966]).  ANOTHER SUGGESTED ANSWER: Tax pyramiding refers to a situation where some or all of the stages of distribution of goods or services are taxed, with the accumulation borne by the final consumer. There is tax pyramiding when sales taxes are applied to both inputs and outputs, thus shifting the tax burden to the ultimate consumer. It has no basis in law because it violates the principle of uniformity and neutrality in taxation (R.G. Holcombe, Taxing Services, 30 Fla. St. U.L. Rev. 467 [19966]) (BAR 2006) 2. Lily’s Fashion, Inc. is a garment manufacturer located and registered as a Subic Bay Freeport Enterprise under Republic Act No. 7227 and a non-VAT taxpayer. As such, it is exempt from payment of all local and national internal revenue taxes. During its operations, it purchased various supplies and materials necessary, in the conduct of its manufacturing business. The suppliers of these goods shifted to Lily’s Fashion, Inc. the 10% VAT on the purchased items amounting to P500,000.00. Lily’s Fashion, Inc. filed with the BIR a claim for refund for the input tax shifted to it by the suppliers. If you were the Commissioner of Internal Revenue, will you allow the refund? 5% SUGGESTED ANSWER: No. The exemption of lily's Fashion, Inc. is only for taxes for which it is directly liable, hence, it cannot 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. Lily's Fashion, Inc. is not the taxpayer in so far as the passed-on tax is concerned and therefore, it cannot claim for a refund of a tax merely shifted to it. Only taxpayers are allowed to file a claim for refund (Phil. Acetylene Co., Inc. v. C£R, 20 SCRA 1056 [1987]). (BAR 2006) 3.  As an incentive for investors, a law was passed giving newly established companies in certain economic zone exemption from all taxes, duties, fees, imposts and other charges for a period of three years. ABC Corp. was organized and was granted such incentive. In the course of business, ABC Corp. purchased mechanical equipment from XYZ Inc. Normally, the sale is subject to a sales tax. XYZ Inc. claims, however, that since it sold the equipment to ABC Corp. which is tax exempt, XYZ should not be liable to pay the sales tax.  Assume arguendo that XYZ had to and did pay the sales tax. ABC Corp. later found out, however, that XYZ merely shifted or passed on to ABC the amount of the sales tax by increasing the purchase price.  ABC Corp. now claims for a refund from the Bureau of Internal Revenue in an amount corresponding to the tax passed on to it since it is tax exempt. Is the claim of ABC Corp. meritorious? SUGGESTED ANSWER: Page | 6

No. The claim of ABC Corp. is not meritorious. Although the tax was shifted to ABC Corp. by the seller, what is paid by it is not a tax but part of the cost it has assumed. Hence, since ABC Corp. is not a taxpayer, it has no capacity to file a claim for refund. The taxpayer who can file a claim for refund is the person statutorily liable for the payment of the tax. (BAR 2004) b.Tax avoidance 1. Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of PI million. Said property has been leased to MAS Corporation, a domestic corporation engaged in manufacturing paper products, owned 99% by Maria Suerte. In October 2007, EIP Corporation, a real estate developer, expressed its desire to buy the Makati property at its fair market value of P300 million, payable as follows: (a) P60 million down payment; and (b) balance, payable equally in twenty four (24) monthly consecutive installments. Upon the advice of a tax lawyer, Maria Suerte exchanged her Makati property for shares of stock of MAS Corporation. A BIR ruling, confirming the tax-free exchange of property for shares of stock, was secured from the BIR National Office and a Certificate Authorizing Registration was issued by the Revenue District Officer (RDO) where the property was located. Subsequently, she sold her entire stockholdings in MAS Corporation to EIP Corporation for P300 million. In view of the tax advice, Maria Suerte paid only the capital gains tax of P29,895,000 (P100,000x 5% plus P298,900,000 x 10%), instead of the corporate income tax of PI04,650,000 (35% on P299 million gain from sale of real property). After evaluating the capital gains tax payment, the RDO wrote a letter to Maria Suerte, stating that she committed tax evasion. Is the contention of the RDO tenable? Or was it tax avoidance that Maria Suerte had resorted to? Explain. (6%) SUGGESTED ANSWER: The contention of the RDO is not tenable. Maria Suerte resorted to tax avoidance and not tax evasion. Tax avoidance is the use of legal means to reduce tax liability and it is the legal right of a taxpayer to decrease the amount of what otherwise would be his taxes by means which the law permits. (Heng Tong Textiles Co., Inc. v. Commissioner, 24 SCRA 767 [1968J\. There is nothing illegal about transferring first the property to' a corporation in a tax free exchange and later selling the shares obtained in the exchange at a lower tax than what could have been imposed if the property was sold directly.  ANOTHER SUGGESTED ANSWER: The contention is devoid of basis. To constitute tax amount of tax less than what is kno wn by the taxpayer to be legally due; 2) an accompanying state of mind which is described as being evil, in bad faith, willful or deliberate and not merely accidental; and 3) a course of action or failure of action which is unlawful. The second and third factors are not present in the instant case, hence there is no tax evasion that was committed. The means employed to reduce taxes being allowed by law, it was a case of tax avoidance that was resorted to. (Commissioner v. Toda, 438 SCRA 290 [2004]). (BAR 2008) 1. Mr. Pascual's income from leasing his property reaches the maximum rate of tax under the law. He donated one-half of his said property to a non-stock, non-profit educational institution whose income and assets are actually, directly and exclusively used for educational purposes, and therefore qualified for tax exemption under Article XTV, Section 4 (3) of the Constitution and Section 30 (h) of the Tax Code. Having thus transferred a portion of his said asset. Mr. Pascual succeeded in paying a lesser tax on the rental income derived from his property. Is there tax avoidance or tax evasion? Explain. (2%) SUGGESTED ANSWER: There is tax avoidance. Mr. Pascual has exploited a legally 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. The donation is likewise exempt from the donor’s tax. The donation is the legal means employed to transfer the incidence of income tax on the rental income. (BAR 2000) Page | 7

2. Distinguish tax evasion from tax avoidance.  ANSWER: Tax evasion is a scheme used outside of those lawful means to escape tax liability and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax avoidance, on the other hand, is a tax saving device within the means sanctioned by law, hence legal. (BAR 1996) c. Tax evasion 1. Josel agreed to sell his condominium unit to Jess for P2. 5 Million. At the time of the sale, the property had a zonal value of P2.0 Million. Upon the advice of a tax consultant, the parties agreed to execute two deeds of sale, one indicating the zonal value of P2.0 Million as the selling price and the other showing the true selling price of P2.5 Million. The tax consultant filed the capital gains tax return using the deed of sale showing the zonal value of' P2.0 Million as the selling price. Discuss the consequences of the action taken by the parties. (5%) SUGGESTED ANSWER: Both Josel and his tax consultant are criminally liable for tax evasion. Here, it is clear that the three requisite factors to constitute tax evasion are present, viz: (1) the end to be achieved which is the payment of less than that known by them to be legally due; (2) an accompanying state of mind which is evil, in bad faith, willfull or deliberate and not merely accidental; and (3) a course of action which is unlawful. [CIR v. Estate of Benigno P. Toda, Jr., 438 SCRA 290 (2004)]. (BAR 2005) 2. In 1995, the BIR filed before the Department of Justice (DOJ) a criminal complaint against a corporation and its officers for alleged evasion of taxes. The complaint was supported by a sworn statement of the BIR examiners showing the computation of the tax liabilities of the erring taxpayer. The corporation filed a motion to dismiss the criminal complaint on the ground that there has been, as yet, no assessment of its tax liability; hence, the criminal complaint was premature. The DOJ denied the motion on the ground that an assessment of the tax deficiency of the corporation is not a precondition to the filing of a criminal complaint and that in any event, the joint affidavit of the BIR examiners may be considered as an assessment of the tax liability of the corporation. Is the ruling of the DOJ correct? Explain. (5%) SUGGESTED ANSWER: Yes. The ruling of the DOJ in denying the motion is correct. The issuance of the deficiency assessment notice prior to prosecution is not necessary because the facts of the case show that the crime of evasion is complete since the violator has knowingly and willfully filed a fraudulent return with intent to evade/defeat a part or all of the tax. [Ungdb v. Cusi, Jr., 97 SCRA 877 (1980)]. What is involved here is not the collection of taxes but a criminal prosecution for violation of the National Internal Revenue Code. However, the contention that the joint affidavit of the BIR examiners showing the computation of tax liabilities maybe considered an assessment is erroneous. It is not an assessment which may entitle the taxpayer to protest. [CIR v. Pascor Realty 81 Development Corp., 309 SCRA402 (1999)]. An assessment is a formal notice to the taxpayer stating that the amount thereon is due as a tax and containing a demand for the payment thereof. [Alhambra Cigar & Cigarette Mfg. Co. v. Collector, 105 Phil. 1337 (1959)] (BAR 2005) 3. Distinguish tax evasion from tax avoidance.  ANSWER: Tax evasion is a scheme used outside of those lawful means to escape tax liability and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax avoidance, on the other hand, is a tax saving device within the means sanctioned by law, hence legal. (BAR 1996) Page | 8

5.

Exemption from taxation

1. The President of the Philippines and the Prime Minister of Japan entered into an executive agreement in respect of a loan facility to the Philippines from Japan whereby it was stipulated that interest on loans granted by private Japanese financial institutions to private financial Institutions in the Philippines shall not be subject to Philippine income taxes. Is this tax exemption valid? Explain  ANSWER: Yes. The tax exemption is valid because an executive agreement has the force and effect of a treaty under the provision of the Revenue Code. Taxation is subject to International Comity.  ALTERNATIVE ANSWERS: a) The act of tax exemption is an act of taxation which is inherently legislative. Therefore, a mere executive agreement cannot provide for a tax exemption. b) No. Under the NIRC, for interest on investment in the Philippines in loans to be exempt from taxation, such investment must have been made by foreign government-owned or controlled financing institutions or international financing institutions established by governments. In the case at bar, the loans would be granted by private Japanese financial institutions and therefore, the interest thereon would not be exempt from taxation. (BAR 1992) 2. In a loan agreement between the Central Bank of the Philippines (as borrower) and private international bank (as lender), it is stipulated that all payments of Interest by the Central Bank to the lenders shall be made free and clear from all Philippine taxes which may be imposed thereon. Is the stipulation valid? Explain.  ANSWER: No. The act of tax exemption is an act of taxation which is inherently legislative and, therefore, a mere executive agreement without concurrence by Congress cannot provide for a tax exemption.  ALTERNATIVE ANSWER: It is valid. The stipulation in the agree ment that the lender “shall be made free and clear" from all Philippine taxes, simply meant that the Central Bank will assume the tax liability which is not contrary to law, morals, good customs, public order or public policy. (BAR 1992) a. Meaning of exemption from taxation b.Nature of tax exemption c. Kinds of tax exemption d.Rationale/grounds for exemption e. Revocation of tax exemption 6.

Compensation and set-off

1. The doctrine of equitable recoupment allows a taxpayer whose claim for refund has prescribed to offset tax liabilities with his claim of overpayment. SUGGESTED ANSWER: True. The doctrine arose from common law allowing offsetting of a prescribed claim for refund against a tax liability arising from the same transaction on which an overpayment is made and underpayment is due. The doctrine finds no application to cases where the taxes involved are totally unrelated, and although it seems equitable, it is not allowed in our jurisdiction (CIR v. VST, 104 Phil. 1062 [1958]). (BAR 2009) Page | 9

2.  ABC Corporation won a tax refund case for P50 Million. Upon execution of the judgment and when trying to get the Tax Credit Certificates (TCC) representing the refund, the Bureau of Internal Revenue (BIR) refused to issue the TCC on the basis of the fact that the corporation is under audit by the BIR and it has a potential tax liability. Is there a valid justification for the BIR to withhold the issuance of the TCC? Explain your answer briefly. SUGGESTED ANSWER: The BIR has no valid justification to withhold the TCC. Offsetting the amount of TCC against a potential tax liability is not allowed, because both obligations are not yet fully-liquidated. While the amount of the TCC has been determined, the amount of deficiency tax is yet to be determined through the completion of the audit. (PhilexMining Corporation v. CIR, 294 SCRA 687[1998]).  ALTERNATIVE ANSWER: There is no valid justification to withhold the TCC. The requirement, that the claim for refund/TCC and liability for deficiency taxes must be settled under one proceeding to avoid multiplicity of suits, will not apply since the determination of the entitlement to the refund was already removed from the BIR. To reopen the claim for refund in order to give way to the introduction of evidence of a deficiency assessment will lead to an endless litigation, which is not allowed. (CIR v. Citytrust Banking Corporation, 499 SCRA 477[2006]). (BAR 2007) 3. May taxes be the subject of set-off or compensation? Explain. SUGGESTED ANSWER: No. Taxes cannot be the subject of set-off or compensation for the following reasons: (1) taxes are of distinct kind, essence and nature, and these impositions cannot be classed in merely the same category as ordinary obligations; (2) the applicable laws and. principles governing each are peculiar, not necessarily common, to each; and (3) public policy is better subserved if the integrity and independence of taxes are maintained. [Republic v. Mambulao Lumber Company, 4 SCRA 622 (1962)]. However, if the obligation to pay taxes and the taxpayer’s claim against the government are both overdue, demandable, as well as fully liquidated, compensation takes place by operation of law and both obligations are extinguished to their concurrent amounts. [Domingo v. Garlitos, 8 SCRA 4 43 (1963)]. (BAR 2005)

4. Can an assessment for a local tax be the subject of set-off or compensation against a final judgment for a sum of money obtained by the taxpayer against the local government that made the assessment? Explain. SUGGESTED ANSWER: No. Taxes and debts are of different nature and character; hence, no set-off or compensation between these two different classes of obligations is allowed. The taxes assessed are the obligations of the taxpayer arising from law, while the money judgment against the government is an obligation arising from contract, whether express or implied. Inasmuch that taxes are not debts, it follows that the two obligations are not susceptible to set-off or legal compensation. [Francia v. Intermediate Appellate Court, 162 SCRA 753 (1988)]. It is only when the local tax assessment and the final judgment are both overdue, demandable, as well fully liquidated may set-off or compensation be allowed. [Domingo v. Garlitos, 8 SCRA 443, (1963)]. (BAR 2005) 5. May a taxpayer who has pending claims for VAT input credit or refund, set-off said claims against his other tax liabilities? Explain your answer. (5%) SUGGESTED ANSWER: No. Set-off is available only if both obligations are liquidated and demandable. Liquidated debts are those where the exact amounts have already been determined. In the instant case, the claim of the taxpayer for VAT refund is still pending and the amount has still to be determined. A fortiori, the liquidated obligation of the Page | 10

taxpayer to the government cannot, therefore, be set-off against the unliquidated claim which the taxpayer conceived to exist in his favor. [Philex Mining Corp. v. CIR, GR No. 125704, August 29, 1998).  ALTERNATIVE ANSWER: No. Taxes and claims for refund cannot be the subject of set-off for the simple reason that the government and the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and a claim for refund. Claims for refunds just like debts are due from the government in its corporate capacity, while taxe3 are due to the government in its sovereign capacity. [Philex Mining Corp. v. CIR, GR No. 125704, August 29, 1998). (BAR 2001) 6. X is the owner of a residential lot situated at Quirino Avenue, Pasay City. The lot has an area of300square meters. On June 1, 1994, 100 square meters of said lot owned by X was expropriated by the government to be used in the widening of Quirino Avenue, for P300,000.00 representing the estimated assessed value of said portion. From 1991 to 1995. X. who is a businessman, has not been paying his income taxes. X is now being assessed for the unpaid income taxes in the total amount of PI50,000.00. X claims his income tax liability has already been compensated by the amount of P300.000.00 which the government owes him for the expropriation of his property. Decide.  ANSWER: The income tax liability of X cannot be compensated with the amount owed by the Government as compensation for his property expropriated. Taxes are of distinct kind, essence and nature than ordinary obligations. Taxes and debts cannot be the subject of compensation because the Government and X are not mutually creditors and debtors of each other and a claim for taxes is not a debt, demand, contract, or judgment as is allowable to be set off. (Francia vs. LAC, G.R 76749. June 28, 1988) (BAR 1996) 7. Ms. Edna Dinoso is the registered owner of a residential lot with a two-story house situated in Naga City. The lot with an area of328 sq. meter is described and covered by TCT No. 4739 of the Registry of Deeds of Naga City. On September 12. 1977, a 115 sq. meter portion of Edna’s property was expropriated by the Republic of the Philippines for the sum of P6.700.00 representing the assessed value of the aforesaid portion: This amount was deposited by the Government in Edna’s account.

For almost ten (10) years, Edna failed to pay her real estate taxes on the same property. Thus, on November 5, 1977, her property was sold at public auction by the City Treasurer of Naga City to satisfy her real estate tax delinquencies amounting to P5, 800.00. The highest bidder for the property was Angel Chua. Edna was not present at the public auction although she later admitted having received the notice of hearing for the petition for entry of a new certificate of title by Angel Chua. (Both the auction sale and the final bill of sale were annotated at the back of TCT No. 4739 by the Register of Deeds.) On March 15, 1979, Edna filed a complaint to annul the auction sale which was denied by the CFI Judge of Naga City. In fact, the CFI Judge ordered the TCT # 4739 of Edna be cancelled and that a new title be issued to Angel Chua. On appeal, the Court of Appeals affirmed the CFI decision in toto. Edna then elevated the case to the Supreme Court citing several grave errors of law, among which are: That her tax delinquencies (involving P5, 800.00) for non-payment of real estate taxes were offset by the sum of P6,700.00which the government of the Philippines owed her. She claims that her tax delinquencies have been extinguished by legal compensation: Discuss the merits of the appeal. Page | 11

 ANSWER: The decision of the Court of Appeals affirming the CFI decision must be affirmed. On the procedural aspect, it has not been shown, as required under the Real Property Tax Code that plaintiff has paid the amount for which the real property has been sold plus interest. On the claim of extinction of tax liability by legal compensation, there is jurisprudence to the effect that the doctrine of equitable recoupment does not apply in this Jurisdiction. Assuming it does, the facts of the case bear out that the Government does not owe the plaintiff any amount. (BAR 1992) 7. 8.

Compromise Tax amnesty a. Definition b.Distinguished from tax exemption

1. Distinguish a tax amnesty from a tax exemption. (3%) SUGGESTED ANSWER: Tax amnesty is 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. (People v. Castaneda, G.R. No. L- 46881, 1988). Tax exemption is immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge or burden to which others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365). It is generally prospective in application. (BAR 2001) 9.

Construction and interpretation a. Tax laws b.Tax exemption and exclusion

1. Citing Section 10. Article VIII of the 1987 Constitution which provides that salaries of judges shall be fixed by law and that during their continuance in office their salary shall not be decreased, a judge of MM Regional Trial Court questioned the deduction of withholding taxes from his salary since it results into a net deduction of his pay. Is the contention of the judge correct? Reason briefly. (5%) SUGGESTED ANSWER: No. The contention is incorrect. The salaries of judges are not tax-exempt and their taxability is not contrary to the provisions of Section 10, Article V of the Constitution on the non-diminution of the salaries of members of the judiciary during their continuance in office. The clear intent of the Constitutional Commission that framed the Constitution is to subject their salaries to tax as in the case of all taxpayers. Hence, 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. (Nitqfan et, al. v, CIR, 152 SCRA 284 [1987)} (BAR 2004) 2.  As an incentive for investors, a law was passed giving newly established companies in certain economic zone exemption from all taxes, duties, fees, imposts and other charges for a period of three years. ABC Corp. was organized and was granted such incentive. In the course of business, ABC Corp. purchased mechanical equipment from XYZ Inc. Normally, the sale is subject to a sales tax. XYZ Inc. claims, however, that since it sold the equipment to ABC Corp. which is tax exempt, XYZ should not be liable to pay the sales tax. Is this claim tenable? (5%) Page | 12

SUGGESTED ANSWER: No. Exemption from taxes is personal in nature and covers only taxes for which the taxpayer-grantee is directly liable. The sales tax is a tax on the seller who is not exempt from taxes. Since XYZ 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. A tax exemption is construed in strictissimi Juris and it cannot be permitted to exist upon vague implications (Asiatic Petroleum Co., Ltd. V. Llanes, 49 Phil 466 [1926]). (BAR 2004) 3. Why are tax exemptions strictly construed against the taxpayer?  ANSWER: Tax exemptions are strictly construed against the taxpayer because such provisions are highly disfavored and may almost be said to be odious to the law (Manila Electric Company vs. Vera, 67 SCRA351). The exception contained in the tax statutes must be strictly construed against the one claiming the exemption because the law does not look with favor on tax exemptions they being contrary to the life-blood theory which is the underlying basis for taxes. (BAR 1996) c. Tax rules and regulations 1. In civil cases involving the collection of internal revenue taxes, prescription is construed strictly against the government and liberally in favor of the taxpayer. (1%) SUGGESTED ANSWER: TRUE. [CIR v. BF Goddrich., Phils. Inc., GR No. 104171, Feb 24, 1999; Phil. Journalists Inc. v. CIR G.R. No. 162852, Dec. 16, 2004] 2. XYZ Corporation, an export-oriented company, was able to secure a Bureau of Internal Revenue (BIR) ruling in June 2005 that exempts from tax the importation of some of its raw materials. The ruling is of first impression, which means the interpretations made by the Commissioner of Internal Revenue are one without established precedents. Subsequently, however, the BIR issued another ruling which in effect would subject to tax such kind of importation. XYZ Corporation is concerned that said ruling may have a retroactive effect, which means that all their importations done before the issuance of the second ruling could be subject to tax. What are BIR rulings? SUGGESTED ANSWERS: BIR rulings are administrative opinions issued by the Commissioner of Internal Revenue interpretative of a provision of a tax law.  ALTERNATIVE ANSWER: They are the best guess of the moment and incidentally often contain such well-considered and sound law, but the courts have held that they do not prevent an entire change of front at any time and are merely advisory sort of an information service to the taxpayer. (Aban, Law of Basic Taxation in the Philippines, p. 149 citing Quiazon and Lukban). (BAR 2007) d.Penal provisions of tax laws 1. In criminal cases involving tax offenses punishable under the National Internal Revenue Code (NIRC), prescription is construed strictly against the government. (1%) SUGGESTED ANSWER: FALSE. [Lim v. Court of Appeals, GR No. 48134-37, Oct 18, 1990.] Page | 13

e. Non-retroactive application to taxpayers 1. Does a BIR ruling have a retroactive effect, considering the principle that tax exemptions should be interpreted strictly against the taxpayer? SUGGESTED ANSWER: No. A BIR ruling cannot be given retroactive effect if its retroactive application is prejudicial to the taxpayer. (Section 246, NIRC; CIR v. Court of Appeals et. al. 267 SCRA 557[1997]).  ALTERNATIVE ANSWER: The general rule is that a BIR ruling does not have a retroactive effect if giving it a retroactive application is prejudicial to the taxpayer. However, if the first ruling is tainted with either of the following: (1) misstatement or omission of material facts, (2) the facts gathered by the BIR are materially different from the facts upon which the ruling is based, or (3) the taxpayer acted in bad faith, a subsequent ruling can have a retroactive application. (ABS-CBN Broadcasting Co. v. CTA & CIR, 08 SCRA 142 [1981]; Sec 246, NIRC). (BAR 2007) 2. Due to an uncertainty whether or not a new tax law is applicable to printing companies. DEF Printers submitted a legal query to the Bureau of Internal Revenue on that issue. The BIR issued a ruling that printing companies are not covered by the new law. Relying on this ruling, DEF Printers did not pay said tax. Subsequently, however, the BIR reversed the ruling and issued a new one stating that the tax covers printing companies. Could the BIR now assess DEF Printers for back taxes corresponding to the years before the new ruling? Reason briefly. (5%) SUGGESTED ANSWER: No. Reversal of a ruling shall not be given a retroactive application if said reversal will be prejudicial to the taxpayer. Therefore, the BIR cannot assess DEF printers for back taxes because it would be violative of the principle of non-retroactivity of rulings and doing so would result in grave injustice to the taxpayer who relied on the first ruling in good faith (Section 246, NIRC; CIR v. Burroughs, Inc,, 142 SCRA 32411986]), (BAR 2004) I.

Scope and limitation of taxation 1. Inherent limitations

1. Enumerate the four (4) inherent limitations on taxation. Explain each item briefly. (4%)  ANSWER: The inherent limitations on the power to tax are: 1. Taxation is for a public purpose. - The proceeds of the tax must be used (a) for the support of the State or (b) for some recognized objective of the government or to directly promote the welfare of the community. 2.

Taxation is inherently legislative. - Only the legislature has full discretion as to the persons, property, occupation or business to be taxed provided these are all within the State’s territorial jurisdiction. It can also finally determine the amount or rate of tax, the kind of tax to be imposed and the method of collection (1 Cooley 176184).

3.

Taxation is territorial. - Taxation may be exercised only within the territorial jurisdiction of the taxing authority (61 Am. Jur. 88). Within the territorial jurisdiction, the taxing authority may determine the place of taxation” or “ tax situs",

4.

Taxation is subject to international comity. - This is a limitation which is founded on reciprocity designed to maintain a harmonious and productive relationships among the various states. Under international comity, a state must recognize the generally-accepted tenets of international law, among which are the Page | 14

principles of sovereign equality among states and of their freedom from suit without their consent, that limit the authority of a government to effectively impose taxes on a sovereign state and its instrumentalities, as well as on its property held, and activities undertaken in that capacity. (BAR 2009) a. Public purpose b.Inherently legislative (1) Exceptions (i) Delegation to local governments 1. May Congress, under the 1987 Constitution, abolish the power to tax of local governments? SUGGESTED ANSWER: No. Congress cannot abolish what is expressly granted by the fundamental law. The only authority conferred to Congress is to provide the guidelines and limitations on the local government’s exercise of the power to tax (Sec. 5, Art X, 1987 Constitution). (BAR 2003) 2. Congress, 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 system of taxation by centralizing the imposition and collection of all taxes in the national government. Accordingly, it is thinking 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 Constitution? Explain your answer. (5%) SUGGESTED ANSWER: No. The law centralizing the imposition and collection of all taxes in the national government would contravene the Constitution which mandates that : . . . "Each local government unit shall have the power to create their own sources of revenue and to levy taxes, fees, and charges subject to such guidelines and limitations as Congress may provide consistent with the basic policy of local autonomy." It is clear that Congress 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 Congress. (BAR 2001) (ii) Delegation to the President (iii) Delegation to administrative agencies

c. Territorial (1) Situs of taxation (a) Meaning (b) Situs of income tax 1. From what sources of income are the following persons/ corporations taxable by the Philippine government? 1. Citizen of the Philippines residing therein; [1%] 2. Non-resident citizen; [1%] 3.  An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker; [1%] 4.  An alien individual, whether a resident or not of the Philippines; [1%] 5.  A domestic corporation; [1%) SUGGESTED ANSWER: (Section 23, NIRC of 1997) 1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. Page | 15

2. A nonresident citizen is taxable only on income derived from sources within the Philippines. 3. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines. 4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. 5. A domestic corporation is taxable on all income derived from sources within and without the Philippines. (BAR 1998) 2. Juan, a Filipino citizen, has immigrated to the United States where he is now a permanent resident. He owns certain income-earning property in the Philippines from which he continues to derive substantial income. He also receives income from his employment in the United States on which the US income tax is paid. On which of the above income is the taxable, if at all, in the Philippines, and how, in general terms, would such income or incomes be taxed?  ANSWER: Juan shall be taxed on both his Income from the Philippines and on his income from the United States because his being a citizen makes him taxable on all income wherever derived. For the income he derives from his property in the Philippines, Juan shall be taxed on his net Income under the Simplified Net Income Taxation Scheme (SN1TS) whereby he shall be considered as a self-employed individual. His income as employee in the United States, on the other hand, shall be taxed in accordance with the schedular graduated rates of 1%, 2% and 3% based on the adjusted gross income derived by non-resident citizens from all sources without the Philippines during each taxable year. (BAR 1997) 3. What is the principle of mobilia sequuntur personam in income taxation?  ANSWER: Principle of mobilia sequuntur personam in income taxation refers to the principle that taxation follows the property or person who shall be subject to the tax. (BAR 1994) 4. Newtex International (Phils.) Inc. is an American firm duly authorized to engage in business in the Philippines as a branch office. In its activity of acting as a buying agent for foreign buyers of shirts and dresses abroad and performing liason work between its home office and the Filipino garment manufacturers and exporters. Newt ex does not generate any income. To finance its office expenses here, its head office abroad regularly remits to it the needed amount. To oversee its operations and manage its office here, which had been in operation for two (2) years, the head office assigned three (3) foreign personnel.  Are the three foreign personnel subject to Philippine income tax?  ANSWER: The three (3) foreign personnel are subject to tax on the income that they receive for services rendered in the Philippines. Non-resident aliens are subject to tax on income from sources within the Philippines. Income is deemed derived from sources within the country when it is earned for services rendered in the Philippines (Sec. 22. in relation to Sec. 36, NIRC). (BAR 1991) (1) From sources within the Philippines 1. Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It is not licensed to do business in the Philippines. Its commercial airplanes do not operate within Philippine Page | 16

territory, or service passengers embarking from Philippine airports. The firm is represented in the Philippines by its general agent, Philippine Airlines (PAL), a Philippine corporation. KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside the Philippines. The total sales of airline tickets transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding tha t KIA’s airline ticket sales constituted income derived from sources within the Philippines. KIA filed a protest on the ground that the P2,968,156.00 should be considered as income derived exclusively from sources outside the Philippines since KIA only serviced passengers outside Philippine territory. Is the position of KIA tenable? Reasons. (4%) SUGGESTED ANSWER: KIA’s position is not tenable. The revenue it derived in 1997 from sales of airplane tickets in the Philippines, through its agent PAL, is considered as income from within the Philippines, subject to the 35% tax based on its taxable income pursuant to Section 25(a)( 1) of the Tax Code of 1977. The transacting of business in the Philippines through its local sales agent, makes KIA a resident foreign corporation despite the absence of landing rights, thus, it is taxable on income derived from within. The source of an income is the property, activity or service that produced the income. In the instant case, it is the sale of tickets in the Philippines which is the activity that produced the income. KIA’s income being derived from within, is subject to Philippine income tax (CIR v. British Overseas Airways Corporation, 149 SCRA 395, [1987]). Note: The taxable year involved in the problem is 1997, hence, the suggested answer above follows the applicable provision of the old Tax Code (National Internal Revenue Code of1977) then in effect and the prevailing jurisprudence on the matter. However, with the adoption of the National Internal Revenue Code ofl997(RA 8424) which took effect on January 1, 1998, it is expected that the bar candidates have lost track of the change in the tax law which transpired more than a decade ago. For this reason, it is respectfully requested that an answer based on the provisions of the New Tax Code shall be given full credit. Accordingly, an answer framed in this wise should also be considered as a correct answer, viz:  ANOTHER SUGGESTED ANSWER: Yes. KIA is a non-resident foreign corporation which is taxable only on income from within. The income of KIA as an international air carrier is derived from the sale of transportation services. Compensation for services is an income from within if the services are performed in the Philippines (Section 42(A)(3), NIRC). The origination of the flight is determinative of the source of the income of the international air carrier. If the flight originates in the Philippines to a foreign destination, the income is an income from within; if it originates in a foreign country to any destination, the income is from without. In the case at bar, no flight will originate from the Philippines because KIA is not licensed to do business here. Hence, the income is not taxable in the Philippines (Section 28(A)(3)(a), NIRC). (BAR 2009) 2. Caledonia Aircargo is an off-line international carrier without any flight operations in the Philippines. It has, however, a liaison office in the Philippines which is duly licensed with the Securities and Exchange Commission, established for the purpose of providing passenger and flight information, reservation and ticketing services.  Are the revenues of Caledonia Aircargo from tickets reserved by its Philippine office subject to tax?  ANSWER: The revenues in the Philippines of Caledonia Aircargo as an “off -line'’ airline from ticket reservation services are taxable income from “ whatever source" under Sec. 28(a) of theTax Code. This case is analogous to Commissioner v. BOAC. G.R No. No. 65773-74, April 30, 1987 where the Supreme Court ruled that the income Page | 17

received in the Philippines from the sale of tickets by an “off -line" airline is taxable as Income from whatever source. (BAR 1994)

(2) From sources without the Philippines 1. Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manages their business, filed a joint income tax return for 1997 on March 15.1998. After an audit of the return, the BIR issued on April 20, 2001 a deficiency income tax assessment for the sum of P250,000.00, inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on  August 19,2001 warrants of distraint and levy to enforce collection of the tax. What is the rule of income taxation with respect to Mr. Sebastian's income in 1997 as a seaman on board the Norwegian vessel engaged in international shipping? Explain your answer. (2%) SUGGESTED ANSWER: The income of Mr. Sebastian as a seaman is considered as income of a non-resident citizen derived from without the Philippines. The total gross income, in US dollars (or if in other foreign currency, its dollar equivalent) 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). He is entitled to deduct from his dollar gross income a personal exemption of $4,500 and foreign national Income taxes paid to arrive at his adjusted income during the year. His adjusted income will be subject to the graduated’ tax rates of 1% to 3%. (Sec. 21(b), Tax Code of 1986[PD 1158], as amended by PD 1994). Note: The bar candidates are not expected to be familiar with tax history. Considering that this is already the fourth year of implementation of the Tax Code of 1997, bar candidates were taught and prepared to answer questions based on the present law. It is therefore requested that the examiner be more lenient in checking the answers to this question. Perhaps, an answer based on the present law be given full credit. (BAR 2002) (3) Income partly within and partly without the Philippines (c) Situs of property taxes (1) Taxes on real property (2) Taxes on personal property (d) Situs of excise tax (1) Estate tax (2) Donor’s tax (e) Situs of business tax (1) Sale of real property (2) Sale of personal property (3) Value-Added Tax (VAT) b. International comity 1.  ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who are residents of the United States. For the 2nd quarter of 1983, these U.S.- based individual and corporate stockholders received cash dividends from the corporation. The corresponding withholding tax on dividend income — 30% for individual and 35% for corporate non-resident stockholders — was deducted at source and remitted to the BIR. On May 15,1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the U.S. the Commissioner denied the claim. Page | 18

On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand for refund. Is the contention of ABCD Corporation correct? Why or why not? (3%) SUGGESTED ANSWER: Yes. The provision of a treaty must take precedence over and above the provisions of the local taxing statute consonant with the principle of the international comity. Tax treaties are accepted limitations to the power of taxation. Thus, the CTA should apply the treaty provision so that the claim for refund representing the difference between the amount actually withheld and paid to the BIR and the amount due and payable under the treaty, should be granted (Hawaiian-Philippine Company v. CIR, CTA Case No. 3887, May 31, 1988).  ANOTHER SUGGESTED ANSWER: The contention of ABCD Corporation that it overpaid the withholding tax is correct provided it can establish: (1) The existence of RP-US Tax Treaty is imposing a lower rate of tax of 25%; (2) the said tax treaty is applicable to its case; and (3) its payment with the BIR of a tax based on a higher rate of 30% and 35%, respectively. (BAR 2009) c. 2.

Exemption of government entities, agencies and instrumentalities

Constitutional limitations a. Provisions directly affecting taxation (1) Prohibition against imprisonment for non-payment of poll tax (2) Uniformity and equality of taxation

1. The City of Makati, in order to solve the traffic problem in its business districts, decided to impose a tax, to be paid by the driver, on all private cars entering the city during peak hours from 8:00 a.m. to 9:00 a.m. from Mondays to Fridays, but exempts those cars carrying more than two occupants, excluding the driver. Is the ordinance valid? Explain. SUGGESTED ANSWER: The ordinance is in violation of the Rule of Uniformity and Equality, which requires that all subjects or objects of taxation, similarly situated must be treated alike in equal footing and must not classify the subjects in an arbitrary manner. In the case at bar, the ordinance exempts cars carrying more than two occupants from coverage of the said ordinance. Furthermore, the ordinance only imposes the tax on private cars and exempts public vehicles from the imposition of the tax, although both contribute to the traffic problem. There exists no substantial standard used in the classification by the City of Makati. Another issue is the fact that the tax is imposed on the driver of the vehicle and not on the registered owner of the same. The tax does not only violate the requirement of uniformity, but the same is also unjust because it places the burden on someone who has no control over the route of the vehicle. The ordinance is, therefore, invalid for violating the rule of uniformity and equality as well as for being unjust. (BAR 2003) 2. Explain the requirement of uniformity as a limitation in the imposition and/or collection of taxes. [5%] SUGGESTED ANSWER: Uniformity in the imposition and/or collection of taxes means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The requirement of uniformity is complied with when the tax operates with the same force and effect in every place where the subject of it is found (Churchill & Tait v. Conception, 34 Phil. 969). It does not mean that lands, chattels, securities, income, occupations, franchises, privileges, necessities and luxuries shall be assessed at the same rate. Different articles maybe taxed at Page | 19

different amounts provided that the rate is uniform on the same class everywhere with all people at all times. Accordingly, singling out one particular class for taxation purposes does not infringe the requirement of uniformity. FIRST ALTERNATIVE ANSWER: The criteria is met when the tax laws operate equally and uniformly on all persons under similar circumstances. All persons are treated in the same manner, the conditions not being different, both in privileges conferred and liabilities imposed. Uniformity in taxation also refers to geographical uniformity. Favoritism and preference is not allowed. SECOND ALTERNATIVE ANSWER: A tax is deemed to have satisfied the uniformity rule when it operates with the same force and effect in every place where the subject maybe found. (Phil. Trust 8L Co. v. Yatco. 69 Phil. 420). (BAR 1998) 3. Five years ago Marquez, Peneyra, Jayme, Posadas and Manguiat, all lawyers, formed a partnership which they named Marquez and Peneyra Law Offices. The Commissioner of Internal Revenue thereafter issued Revenue Regulation No. 2-93 implementing RA. 7496 known as the Simplified Net Income Taxation Scheme (SNITS). Revenue Regulation No. 2-93 provides in part: “Sec. 6. General Professional Partnership. -The general professional partnership and the partners are covered by RA. 7496. Thus, in determining profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, 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.”

Marquez and Peneyra Law Offices filed a taxpayer’s suit alleging that Revenue Regulation No. 2 -93 violates the principle of uniformity in taxation because general professional partnerships are now subject to payment of income tax and that there is a difference in the tax treatment between individuals engaged in the practice of their respective professions and partners in general professional partnerships. Is this contention correct? Explain.  ANSWER: The contention is not correct. General 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. The SNITS treat professionals as one class of taxpayer so that they shall be treated alike 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. All individuals similarly situated are taxed alike under the regulations, therefore, the principle of uniformity in taxation is not violated. On the contrary, all the requirements of a valid classification have been complied with [Tan vs. del Rosario et al G.R No. 109289, October 3. 1994). (BAR 1995) (3) Grant by Congress of authority to the president to impose tariff rates (4) Prohibition against taxation of religious, charitable entities, and educational entities 1.  A law imposing a tax on income of religious institutions derived from the sale of religious articles is valid. SUGGESTED ANSWER: False. Congress can pass a law taxing income of religious institutions from its property or activities used for profit but not on their income from exercise of religious activities. The imposition of a tax on income of a Page | 20

religious institution from sale of religious articles is an infringement of religious freedom which is not allowed under the fundamental law (American Bible Society v. City of Manila, 101 Phil. 386[1957J). 2. The Constitution provides “charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and 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." This provision exempts charitable institutions and religious institutions from what kind of taxes? Choose the best answer. Explain. 5% a. b. c. d. e.

from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and real property tax from income tax only from value-added tax only from real property tax only from capital gains tax only

SUGGESTED ANSWER: I choose (d), from real property tax only. This is the connotation of the phrase “and all lands, buildings and improvements" thereby limiting the exemption to real property taxes only (CIR v. CA, 298 SCRA 83 [1998]; Lladoc v. Commissioner, 14 SCRA 292 [1967]; Hodges v. Municipal Board of Iloilo City, 19 SCRA 28 [1965]). (BAR 2006) 3. The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac province. The southern side and middle part are occupied by the Church and a convent, the eastern side by a school run by the Church itself, the southeastern side by some commercial establishments, while the rest of the property, in particular the northwestern side, is idle or unoccupied. May the Church claim tax exemption on the entire land? Decide with reasons. (5%) SUGGESTED ANSWER: No. The portions of the land occupied and used by the church, convent and school run by the church are exempt from real property taxes while the portion of the land occupied by commercial establishments and the portion, which is idle, are subject to real p roperty taxes. The “usage” of the property and not the “ownership" is the determining factor whether or not the property is taxable. [Lung Center of the Philippines v. Q.C., 433 SCRA 119 (2004)]. (BAR 2005) 4. XYZ Colleges is a non-stock, non-profit educational institution run by the Archdiocese of BP City. It collected and received the following: (a) (b) (c) (d) (e)

Tuition fees Dormitory fees Rentals from canteen concessionaires Interest from money-market Donation of a lot and building by school alumni

SUGGESTED ANSWER: All of the Income derived by the non-stock, nonprofit educational institution will be exempt from taxation provided they are used actually, directly and exclusively for educational purposes. The Constitution provides that all revenues and assets of non-stock, non-profit educational institution which are actually, directly and exclusively used for educational purposes are exempt from taxation (Section 4 par. 3, Article XIV, 1987 Constitution). The donation is, likewise, exempt from the donor's tax if actually, directly and exclusively used for educational purposes, provided not more than 30% of the donation is used by the donee for administration purposes. The Page | 21

donee, being a non-stock, non-profit educational institution, is a qualified entity to receive an exempt donation subject to conditions prescribed by law (Section 4 par. 4, Art. XIV, 1987 Constitution, in relation to Section 101(A)(3), NIRC). Accordingly, none of the cited income and donation collected and received by the non-stock, non-profit educational institution would not be exempt from taxation.  ALTERNATIVE ANSWER: The following receipts by the non-stock, nonprofit educational institution are not exempt from taxation, viz: (c) Rentals from canteen concessionaires. Rental income is considered as unrelated to the school operations; hence, taxable (DOF Order No. 137-87, Dec. 16, 1987) (d) Interest from money-market placements of the tuition fees. The interest on the placement is taxable (DOF Order No. 137-87). 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, 298 SCRA 83 (1998)}. The 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 (Section 4 par. 3, Article XIV, 1987 Constitution). The donation to a non-stock, non-profit educational institution will be exempt from the donor’s tax if used actually, directly and exclusively for educational purposes and provided, that, not more than 30% of the donation is used for administration purposes (Section 4, par. 4, Art. XIV, 1987 Constitution if in relation to Section 101(AX3), MRC). Suppose that XYZ Colleges is a proprietary educational institution owned by the Archbishop’s family, rather than the Archdiocese, which of those above cited income and donation would be exempt from taxation? Explain briefly. (5%)

SUGGESTED ANSWER: If XYZ Colleges is a proprietary educational institution, all of its income from school related and non-school related activities will be subject to the income tax based on its aggregate net income derived from both activities (Section 27(B)). Accordingly, all of the income enumerated in the problem will be taxable. The donation of lot and building will likewise be subject to the donor’s tax because a donation to an educational institution is exempt only if the school is incorporated as a non-stock entity paying no dividends. Since the donee is a proprietary educational institution, the donation is taxable (Section 101(A)(3), NIRC) (BAR 2004) 5. XYZ Foundation is a non-stock, non-profit association duly organized for religious, charitable and social welfare purposes. Last January 3. 2000 it sold a portion of its lot used for religious purposes and utilized the entire proceeds for the construction of a building to house its free Day and Night Care Center for children of single parents. In order to subsidize the expenses of the Day and Night Care Center and to support its religious, charitable and social welfare projects, the Foundation leased the 300-square meter area of the second and third floors of the building for use as a boarding house. The Foundation 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 Foundation was organized. Considering the constitutional provision granting tax exemption to non-stock corporations such as those formed exclusively for religious, charitable or social welfare purposes, explain the meaning of the Page | 22

last paragraph of said Sec. 30 of the 1997 Tax Code which states that income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income shall be subject to tax imposed under this Code.” (5%) SUGGESTED ANSWER: The exemption contemplated in the Constitution 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 Section 30 of the Tax Code. As a rule, non-stock nonprofit corporations organized for religious, charitable or social welfare purposes are exempt from income tax on their income received by them as such. However, if these religious, charitable or social welfare corporations derive income from their properties or any of their activities conducted for profit, the income tax shall be imposed on said items of income irrespective of their disposition. (Sec. 30, NIRC; CIR v. YMCA, GR No. 124043, 1998). (BAR 2002) Is the income derived by XYZ Foundation from the sale of a portion of its lot, rentals from its boarding house and the operation of its canteen and gift shop subject to tax? Explain. (5%) SUGGESTED ANSWER: Yes. The income derived from the sale of lot and rentals from its boarding house are considered as income from properties which are subject to tax. Likewise, the income from the operation of the canteen and gift shop is income from its activities conducted for profit which are subject to tax. The income tax attaches irrespective of the disposition of these incomes. (Sec. 30, NIRC; CIRv. YMCA, GR No. 124043, 1998). (BAR 2002) 6.  Article VII, Section 28 (3) of the 1987 Philippine Constitution provides that charitable institutions, churches and personages or covenants appurtenant thereto, mosques, 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. To what kind of tax does this exemption apply? (2%) SUGGESTED ANSWER: This 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. (Commissioner of Internal Revenue v. Court of Appeals, et aL, G.R. No. 124043, October 14, 1998). ( Is proof of actual use necessary for tax exemption purposes under the Constitution? (3%) SUGGESTED ANSWER: Yes, because tax exemptions are strictly construed against the taxpayer. There must be evidence to show that the taxpayer has complied with the requirements for exemption. Furthermore, real property taxation is based on use and not on ownership, hence the same rule must also be applied for real property tax exemptions. BAR 2000) 7. The Constitution exempts from taxation charitable institutions, churches, parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes. Mercy Hospital is a 100-bed hospital organized for charity patients. Can said hospital claim exemption from taxation under the above-quoted constitutional provision? Explain.  ANSWER: Page | 23

Yes. Mercy Hospital can claim exemption from taxation under the provision of the Constitution, but only with respect to real property taxes provided that such real properties are used actually, directly and exclusively for charitable purposes. (BAR 1996) 8. The University of Bigaa, a non-stock, non-profit entity, operates a canteen for its students and a bookstore Inside the campus. It also operates two dormitories for its students, one of which is in the campus. Is the University liable to pay income taxes for the operation of the: 1) canteen? 2) bookstore? 3) two dormitories?  ANSWER: 1) For the operation of the canteen Inside the campus, the income thereon being incidental to the operations of the University as a school, is exempt (Art. XIV (4) (3). Constitution; DECS Regulations No. 137-87, Dec. 16. 1987). 2) For the same reasons, the University of Bigaa is not liable to pay income taxes for the operation of the bookstore, since this is an ancillary activity the conduct of which is carried out within the school premises. 3) The University of Bigaa shall not be liable to pay income taxes for the operation of the dormitory located in the campus, for same reasons as the foregoing. However, the latter shall be liable for Income taxes on income from operations of the dormitory located outside the school premises. (BAR 1994) 9. Four Catholic parishes hired the services of Frank Binatra, a foreign non-resident entertainer, to perform for four (4) nights at the Folk Arts Theater. Binatra was paid P200.000.00 a night. The parishes earned PI,000,000.00 which they used for the support of the orphans in the city. Who are liable to pay taxes?  ANSWER: The following are liable to pay Income taxes: The four catholic parishes because the income received by them, not being income earn ed “as such” in the performance of their religious functions and duties, is taxable income under the last paragraph of Sec. 26, in relation to Sec. 26(e) of the Tax Code. In promoting and operating the Binatra Show, they engaged in an activity conducted for profit. (Ibid.) The income of Frank Binatra, a non-resident alien under our law is taxable at the rate of 30%, final withholding tax based on the gross income from the show. Mr. Binatra is not engaged in any trade or business in the Philippines. (BAR 1994) (5) Prohibition against taxation of non-stock, non-profit educational Institutions 1. XYZ Colleges is a non-stock, non-profit educational institution run by the Archdiocese of BP City. It collected and received the following: (f) (g) (h) (i)

Tuition fees Dormitory fees Rentals from canteen concessionaires Interest from money-market Page | 24

(j)

Donation of a lot and building by school alumni

SUGGESTED ANSWER: All of the Income derived by the non-stock, nonprofit educational institution will be exempt from taxation provided they are used actually, directly and exclusively for educational purposes. The Constitution provides that all revenues and assets of non-stock, non-profit educational institution which are actually, directly and exclusively used for educational purposes are exempt from taxation (Section 4 par. 3, Article XIV, 1987 Constitution). The donation is, likewise, exempt from the donor's tax if actually, directly and exclusively used for educational purposes, provided not more than 30% of the donation is used by the donee for administration purposes. The donee, being a non-stock, non-profit educational institution, is a qualified entity to receive an exempt donation subject to conditions prescribed by law (Section 4 par. 4, Art. XIV, 1987 Constitution, in relation to Section 101(A)(3), NIRC). Accordingly, none of the cited income and donation collected and received by the non-stock, non-profit educational institution would not be exempt from taxation.  ALTERNATIVE ANSWER: The following receipts by the non-stock, nonprofit educational institution are not exempt from taxation, viz: (c) Rentals from canteen concessionaires. Rental income is considered as unrelated to the school operations; hence, taxable (DOF Order No. 137-87, Dec. 16, 1987) (d) Interest from money-market placements of the tuition fees. The interest on the placement is taxable (DOF Order No. 137-87). 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, 298 SCRA 83 (1998)}. The 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 (Section 4 par. 3, Article XIV, 1987 Constitution). The donation to a non-stock, non-profit educational institution will be exempt from the donor’s tax if used actually, directly and exclusively for educational purposes and provided, that, not more than 30% of the donation is used for administration purposes (Section 4, par. 4, Art. XIV, 1987 Constitution if in relation to Section 101(AX3), MRC). Suppose that XYZ Colleges is a proprietary educational institution owned by the A rchbishop’s family, rather than the Archdiocese, which of those above cited income and donation would be exempt from taxation? Explain briefly. (5%) SUGGESTED ANSWER: If XYZ Colleges is a proprietary educational institution, all of its income from school related and non-school related activities will be subject to the income tax based on its aggregate net income derived from both activities (Section 27(B)). Accordingly, all of the income enumerated in the problem will be taxable. The donation of lot and b uilding will likewise be subject to the donor’s tax because a donation to an educational institution is exempt only if the school is incorporated as a non-stock entity paying no dividends. Since the donee is a proprietary educational institution, the donation is taxable (Section 101(A)(3), NIRC) (BAR 2004)

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2. Under Article XIV, Section 4 (3) of the 1987 Philippine Constitution, all revenues and assets of nonstock, non-profit educational institutions, used actually, directly and exclusively for educational purposes, are exempt from taxes and duties. Are income derived from dormitories, canteens automatically exempt from taxation? Explain. (5%) SUGGESTED ANSWER: The income derived from dormitories, canteens and bookstores are not also automatically exempt from taxation. There is still the requirement for evidence to show actual, direct and exclusive use for educational purposes. It is to be noted that the 1987 Philippine Constitution does not distinguish with respect to the source or origin of the income. The distinction is with respect to the use which should be actual, direct and exclusive for educational purposes. Consequently, the provisions of Sec. 30 of the NIRC of 1997, that a nonstock and nonprofit educational institution is exe mpt from taxation only “in respect to income received by them as such" could not affect the constitutional tax exemption. Where the Constitution does not distinguish with respect to source or origin, the Tax Code should not make distinctions. (BAR 2000) 1. The University of Bigaa, a non-stock, non-profit entity, operates a canteen for its students and a bookstore Inside the campus. It also operates two dormitories for its students, one of which is in the campus. Is the University liable to pay income taxes for the operation of the: 1) canteen? 2) bookstore? 3) two dormitories?  ANSWER: 1. For the operation of the canteen Inside the campus, the income thereon being incidental to the operations of the University as a school, is exempt (Art. XIV (4) (3). Constitution; DECS Regulations No. 137-87, Dec. 16. 1987). 2. For the same reasons, the University of Bigaa is not liable to pay income taxes for the operation of the bookstore, since this is an ancillary activity the conduct of which is carried out within the school premises. 3. The University of Bigaa shall not be liable to pay income taxes for the operation of the dormitory located in the campus, for same reasons as the foregoing. However, the latter shall be liable for Income taxes on income from operations of the dormitory located outside the school premises. (BAR 1994) (6) Majority vote of Congress for grant of tax exemption (7) Prohibition on use of tax levied for special purpose (8) President’s veto power on appropriation, revenue, tariff bills (9) Non-impairment of jurisdiction of the Supreme Court (10) Grant of power to the local government units to create its own sources of revenue (11) Flexible tariff clause 1. Which of the following propositions may now be untenable: 1. The court should construe a law granting tax exemption strictly against the taxpayer. 2. The court should construe a law granting a municipal corporation the power to tax most strictly. 3. The Court of Tax Appeals has jurisdiction over decisions of the Customs Commissioner in cases involving liability for customs duties. 4. The Court of Appeals has jurisdiction to review decisions of the Court of Tax Appeals. Page | 26

5. The Supreme Court has jurisdiction to review decisions of the Court of Appeals. Justify your answer or choice briefly. (5%) SUGGESTED ANSWER: 2. The court should construe a law granting a municipal corporation the power to tax most strictly. This proposition is now untenable. The basic rationale for the grant of tax power to local government units is to safeguard their viability and self-sufficiency by directly granting them general and broad tax powers (Manila Electric Company). Province of Laguna et. al 306 SCRA 750 [1999). Considering 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 Constitution, in interpreting statutory provisions on municipal fiscal powers, doubts will, therefore, have to be resolved in favor of municipal corporations (City Government of San Pablo, Laguna v. Reyes, 305 SCRA 353 (1999]). This means that the court must adopt a liberal construction of a law granting a municipal corporation the power to tax. Note: Of the examinee chose proposition no. 4 as his answer, it should be given full credit considering that the present CTA Act (R.A. No. 9282) has made the CTA a coequal judicial body of the Court of Appeals. The question “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-off date adopted by the Bar Examination Committee. R.A. No. 9282 was passed on March 30, 2004. (BAR 2004) 2. May Congress, under the 1987 Constitution, abolish the power to tax of local governments? SUGGESTED ANSWER: No. Congress cannot abolish what is expressly granted by the fundamental law. The only authority conferred to Congress is to provide the guidelines and limitations on the local government’s exercise of the power to tax (Sec. 5, Art X, 1987 Constitution). (BAR 2003) 1. What do you understand by the term “flexible tariff clause" as used in the Tariff and Customs Code? (5%) SUGGESTED ANSWER: The term "flexible tariff clause "refers to the authority given to the President to adjust tariff rates under Section 401 of the Tariff and Customs Code, which is the enabling law that made effective the delegation of the taxing power to the President under the Constitution. Note: It is suggested that if the examinee cites the entire provision of Sec. 401 of the Tariff Customs Code, he should also be given full credit. (BAR 2001) 2. In view of the unfavorable balance of payment condition and the increasing budget deficit, the President of the Philippines. upon recommendation of the National Economic and Development  Authority, issues during a recess of Congress an Executive Order imposing an additional duty on all imports at the rate of ten (10%) percent ad valorem. The Executive Order also provides that the same shall take effect immediately. Ricardo San Miguel, an importer, questions the legality of the Executive Order on the grounds that only Congress has the authority to fix the rates of import duties and, in any event, such an Executive Order can take effect only thirty (30) days after promulgation and the President has no authority to shorten said period.  Are the objections of Mr. San Miguel tenable? Page | 27

 ANSWER: No. the objections are not tenable as the Executive Order cannot take effect “immediately". Being an “external” law and having the effect of law, the Executive Order cannot become effective without publication, a requirement of due process (Tanada vs. Tuvera, 136 SCRA27; Executive Order No. 202).  ALTERNATIVE ANSWER: Under the Flexible Tariff Clause (Sec. 401, Tariff and Customs Code), any order issued by the President thereunder can generally take effect only thirty (30) days after its issuance. In cases however of an order imposing additional import duties, the law provides that the same can take effect immediately. (BAR 1991) (12) Exemption from real property taxes 1. The Constitution provides “ charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and 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." This provision exempts charitable institutions and religious institutions from what kind of taxes? Choose the best answer. Explain. 5% a. b. c. d. e.

from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and real property tax from income tax only from value-added tax only from real property tax only from capital gains tax only

SUGGESTED ANSWER: I choose (d), from real property tax only. This is the connotation of the phrase “and all lands, buildings and improvements" thereby limiting the exemption to real property taxes only (CIRv. CA, 298 SCRA 83 [1998]; Lladoc v. Commissioner, 14 SCRA 292 [1967]; Hodges v. Municipal Board of Iloilo City, 19 SCRA 28 [1965]). (BAR 2006) 2. The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac province. The southern side and middle part are occupied by the Church and a convent, the eastern side by a school run by the Church itself, the southeastern side by some commercial establishments, while the rest of the property, in particular the northwestern side, is idle or unoccupied. May the Church claim tax exemption on the entire land? Decide with reasons. (5%) SUGGESTED ANSWER: No. The portions of the land occupied and used by the church, convent and school run by the church are exempt from real property taxes while the portion of the land occupied by commercial establishments and the portion, which is idle, are subject to real property taxes. The “usage” of the property and not the “ownership" is the determining factor whether or not the property is taxable. [Lung Center of the Philippines v. Q.C., 433 SCRA 119 (2004)]. (BAR 2005) 3.  Article VII, Section 28 (3) of the 1987 Philippine Constitution provides that charitable institutions, churches and personages or covenants appurtenant thereto, mosques, 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. To what kind of tax does this exemption apply? (2%) SUGGESTED ANSWER:

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This 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. (Commissioner of Internal Revenue v. Court of Appeals, et aL, G.R. No. 124043, October 14, 1998). ( Is proof of actual use necessary for tax exemption purposes under the Constitution? (3%) SUGGESTED ANSWER: Yes, because tax exemptions are strictly construed against the taxpayer. There must be evidence to show that the taxpayer has complied with the requirements for exemption. Furthermore, real property taxation is based on use and not on ownership, hence the same rule must also be applied for real property tax exemptions. BAR 2000) 4. The Constitution exempts from taxation charitable institutions, churches, parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes. Mercy Hospital is a 100-bed hospital organized for charity patients. Can said hospital claim exemption from taxation under the above-quoted constitutional provision? Explain.  ANSWER: Yes. Mercy Hospital can claim exemption from taxation under the provision of the Constitution, but only with respect to real property taxes provided that such real properties are used actually, directly and exclusively for charitable purposes. (BAR 1996) (13) No appropriation or use of public money for religious purposes (14) Origin of Revenue and Tariff Bills 1. The House of Representatives Introduced HB 7000 which envisioned to levy a tax on various transactions. After the bill was approved by the House, the bill was sent to the Senate as so required by the Constitution. In the upper house, instead of a deliberation on the House Bill, the Senate introduced SB 8000 which was its own version of the same tax. The Senate deliberated on this Senate Bill and approved the same. The House Bill and the Senate Bill were then consolidated in the Bicameral Committee. Eventually, the consolidated bill was approved and sent to the President who signed the same. The private sectors affected by the new law questioned the validity of the enactment on the ground that the constitutional provision requiring that all revenue bills should originate from the House of Representatives had been violated. Resolve the issue.  ANSWER: There is no violation of the constitutional requirement that all revenue bills should originate from the House of Representatives. What is prohibited is for the Senate to enact revenue measures on its own without a bill originating from the House. But once the revenue bill was passed by the House and sent to the Senate, the latter can pass its own version on the same subject matter consonant with the latter’s power to propose or concur with amendments. This follows from the co-equality of the two chambers of Congress [Tolentino v. Secretary of Finance, GR No. 115455, Oct. 30, 1995). (BAR 1997)

b.Provisions indirectly affecting taxation (1) Due process (2) Equal protection 1. What is the “rational basis” test? Explain briefly. (2%) Page | 29

SUGGESTED ANSWER: The “rational basis test” is applied to gauge the constitutionality of an assailed law in the face of an equal protection challenge. It has been held that “in areas of social and economic policy, a statutory classification that neither proceeds along suspect lines nor infringes constitutional rights must be upheld against equal protection challenge if there is any reasonably conceivable state of facts that could provide a rational basis for the classification”. Under the rational basis test, it is sufficient th at the legislative classification is rationally related to achieving some legitimate State interest (British American Tobacco v. Camacho and Parayno, GR No. 163583, April 15, 2009). 2. The City of Manila enacted Ordinance No. 55-66 which imposes a municipal occupation tax on persons practicing various professions in the city. Among those subjected to the occupation tax were lawyers.  Atty. Mariano Batas, who has a law office in Manila, pays the ordinance-imposed occupation tax under protest. He goes to court to assail the validity of the ordinance for being discriminatory. Decide with reasons. (3%) SUGGESTED ANSWER: The ordinance is valid. The ordinance is not discriminatory because it complies with the rule of equality and uniformity in taxation. Equality and uniformity in local taxation means that all subjects or objects of taxation belonging to the same class shall be taxed at the same rate within the territorial jurisdiction of the taxing authority or local government unit and not necessarily in comparison with other units although belonging to the same political subdivision. In fine, uniformity is required only within the geographical limits of the taxing authority. It is not for the Court to judge what particular cities or municipalities should be empowered to impose occupation tax. In the case at bar, the imposition of the occupation tax to persons exercising various professions in the city is well within the authority ofthe City of Manila (Punsalanet. al. v. City of Manila, 95 Phil. 46 [1954]). (BAR 2009) 3. RC is a law-abiding citizen who pays his real estate taxes promptly. Due to a series of typhoons and adverse economic conditions, an ordinance is passed by MM City granting a 50% discount for payment of unpaid real estate taxes for the preceding year and the condonation of all penalties on fines resulting from the late payment.  Arguing that the ordinance rewards delinquent taxpayers and discriminates against prompt ones, RC demands that he be refunded an amount equivalent to one-half of the real taxes he paid. The municipal attorney rendered an opinion that RC cannot be reimbursed because the ordinance did not provide for such reimbursement. RC files suit to declare the ordinance void on the ground that it is a class legislation. Will his suit prosper? Explain your answer briefly. (5%) SUGGESTED ANSWER: The suit will not prosper. The remission or condonation of taxes due and payable to the exclusion of taxes already collected does not constitute unfair discrimination. Each set of taxes is a class by itself and the law would be open to attack as class legislation only if all taxpayers belonging to one class were not treated alike (Juan Luna Subdivision, Inc,, v, Sarmiento, 91 Phil, 371 (1952)] (BAR 2004) 4.  A law was passed exempting doctors and lawyers from the operation of the value added tax. Other professionals complained and filed a suit questioning the law for being discriminatory and violative of the equal protection clause of the Constitution since complainants were not given the same exemption. Is the suit meritorious or not? Reason briefly. (5%) SUGGESTED ANSWER: Yes, the suit is meritorious. The VAT is designed for economic efficiency; hence, should be neutral to those who belong to the same class. Professionals ARE a class of taxpayers by themselves who, in compliance with the rule of equality of taxation, must be treated alike for tax purposes. Exempting lawyers and doctors from a burden to which other professionals are subjected will make the law discriminatory and violative of the equal protection Page | 30

clause of the Constitution. While singling out a class for taxation purposes will not infringe upon this constitutional limitation (Shell v. Vaho, 94 Phil. 389 [1954}), singling out a taxpayer from a class will no doubt transgress the constitutional limitation (Ormoc Sugar Co. Inc., v. Treasurer of Ormoc City, 22 SCRA 603[1968D* Treating doctors and lawyers as a different class of professionals will not comply with the requirements of a reasonable, hence valid classification, because the classification is not based upon substantial distinction which makes real differences. The classification does not comply with the requirement that it should be germane to the purpose of the law either. (Pepsi-Cola Bottling Co., Inc. v. City of Butuan, 24 SCRA 789 [1968}).  ANOTHER ANSWER: The suit is not meritorious. The equal protection clause of the Constitution merely requires that all persons subjected to legislation shall be treated alike, under like circumstances and conditions, both in the privileges conferred and in the liabilities imposed. The equality in taxation rule is not violated if classifications or distinctions are made as long as the same are based on reasonable and substantial differences. (Pepsi-Cola Bottling Co., Inc. v. City of Butuan, 24 SCRA 789 [1968]). In the instant case, the professions of doctors and lawyers are not principally aimed at earning money but for the service of the people. The exemption granted to doctors and lawyers from the operation of the VAT is justified, as it is not discriminatory against the other professionals because they have reasonable and substantial differences in the conduct of their professions. (BAR 2004) 5.  An Executive Order was issued pursuant to law, granting tax and duty incentives only to businesses and residents within the “secured area" of the Subic Economic Special Zone, and denying said incentives to those who live within the Zone but outside such “secured area". Is the constitutional right to equal protection of the law violated by the Executive Order? Explain. (3%) SUGGESTED ANSWER: No. Equal protection of the law clause is subject to reasonable classification. Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the purpose of the law, (3) not be limited to existing conditions only, (4) apply equally to all members of the same class. There are substantial differences between big Investors being enticed to the "secured area" and the business operators outside that are in accord with the equal protection clause that does not require territorial uniformity of laws. The classification applies equally to all the resident individuals and businesses within the “secured area”. The residents, being in like circumstances to contributing directly to the achievement of the end purpose of the law, are not categorized further. Instead, they are similarly treated, both in privileges granted and obligations required. (Tiu, et al, v. Court of Appeals. et al, G.R. No. 127410, January 20. 19991 (BAR 2000) (3) Religious freedom (4) Non-impairment of obligations of contracts 1.  A law was passed granting tax exemption to certain industries and investments for a period of five years. But three years later, the law was repealed. With the repeal, the exemptions were considered revoked by the BIR, which assessed the investing companies for unpaid taxes effective on the date of the repeal of the law. NPC and KTR companies questioned 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? Reason briefly. (5%) SUGGESTED ANSWER: The contention is not tenable. The exemption granted is in the nature of a unilateral tax exemption. Since 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 revoked at will by the Page | 31

legislature (Christ Church v. Philadelphia24 How. 300 [18601% What constitutes an impairment of the obligation of contracts is the revocation of an exemption which is founded on a valuable consideration because it takes the form and essence of a contract (Casanovas v. Hord, 8 PhiL 125 [1907]; Manila Railroad Company v. Insular Collector of Customs, 12 PhiL 146 [1915)]. (BAR 2004) 2. "X" Corporation was the recipient in 1990 of two tax exemptions both from Congress, one law exempting the company's bond issues from taxes and the other exempting the company from taxes in the operation of its public utilities. The two laws extending the tax exemptions were revoked by Congress before their expiry dates. Were the revocations constitutional? constitutional?  ANSWER: Yes. The exempting statutes are both granted unilaterally by Congress In the exercise of taxing powers. Since 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 Constitution (Mactan Cebu International Airport Authority v. Marcos, G.R No. 120082. September 11, 1996). Neither of these were issued by the taxing authority in a contract lawfully entered by it so that their revocation would not constitute an Impairment Impairment of the obligations of contracts.  ALTERNATIVE ANSWER: ANSWER: No. The withdrawal of the tax exemption amounts to a deprivation of property without due process of law, hence unconstitutional. (BAR 1997) J.

Stages of taxation

1. Enumerate the 3 stages or aspects of taxation. Explain each. 5% SUGGESTED ANSWER: a. Levy. This refers to the enactment of a law by Congress authorizing the imposition of a tax. b. Assessment and Collection. This is the act of administration and implementation of the tax law by the executive through its administrative administrative agencies. c.

Payment. This is the act of compliance by the taxpayer, including such options, schemes or remedies as may be legally available to him. (BAR 2006) 1. 2.

Levy Assessment and collection

1. Is the approval of the court, sitting as probate or estate settlement court, required in the enforcement and collection of estate tax? Explain. (10%) SUGGESTED ANSWER: No. The approval of the court, sitting in probate, is not a mandatory requirement in the collection of estate tax. On the contrary, under Section 94 of the NIRC, it is the probate or settlement court which is forbidden to authorize the executor or judicial administrator of the decedent’s estate, to deliver any distributive share to any party interested in the estate, unless a certification from the Commissioner of Internal Revenue that the estate tax has been paid is shown. [Marcos U v. Court of Appeals, 273 SCRA 47 (1997)]. (BAR 2005) 2. VCC is the administrator of the estate of his father NGC, in the estate proceedings pending before the MM Regional Trial Court. Last year, he received from the Commissioner of Internal Revenue a deficiency tax assessment for the estate in the amount of PI, 000,000. But he ignored the notice. Last Page | 32

month, the BIR affected a levy on the real properties of the estate to pay the delinquent tax. VCC filed a motion with the probate court to stop the enforcement and collection of the tax on the ground that the BIR should have secured first the approval of the probate court, which had jurisdiction over the estate, before levying on its real properties. Is VCC’s conte ntion correct? (5%) SUGGESTED ANSWER: No. VCC’s contention is not correct. The approval of the probate court is not necessary. Payment 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 jurisdiction. Hence, the approval of the court, sitting in probate, or as a settlement tribunal is not a mandatory requirement in the collection of estate taxes (Marcos H v. Court of Appeals, 273 SCRA 47 [1997]). (BAR 2004) 3. 4.

Payment Refund

1. Can the Commissioner grant a refund or tax credit even without a written claim for it? (2%) SUGGESTED ANSWER: Yes. When the taxpayer files a return which on its face shows an overpayment of the tax and the option to refund/ claim a tax credit was chosen by the taxpayer, the Commissioner shall grant the refund or tax credit without the need for a written claim. This is so, because a return filed showing an overpayment shall be considered as a written claim for credit or refund. (Secs. 76 and 204, NIRC). Moreover, the law provides that the Commissioner may, even without a written claim therefore, 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. ('Sec. 229, NIRC). (BAR 2002)

K. Definition, nature, and characteristics of taxes L. Requisites of a valid tax M. Tax as distinguished from other forms of exactions N. Kinds of taxes 1. Distinguish “direct taxes” from “indirect taxes". Give examples. 5% SUGGESTED ANSWER: Direct taxes are demanded from the very person who, as intended, should pay the tax which he cannot shift to another; while an indirect tax is demanded in the first instance 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 (Maceda v. Macaraig, Jr., 223 SCRA 217 [1993]). Examples of direct taxes ar e income tax, estate tax and donor’s tax. Examples of indirect taxes are value-added tax, percentage tax and excise tax o n excisable articles. (BAR 2006) 2. Distinguish direct taxes from indirect taxes, and give an example for each one. (2%) SUGGESTED ANSWER: Direct taxes are taxes wherein either 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. An example of this tax is income tax where the person subject to tax cannot shift the burden of the tax to another person. Indirect taxes, 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. Example of this tax is the value-added tax. (Aban, Law of Basic Taxation p. 20). Page | 33

 ALTERNATIVE ANSWER: ANSWER: A direct tax is a tax which is demanded from the person who also shoulders the burden of the tax. Example: corporate and individual income tax. An 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 finally resting on the ultimate purchaser or consumer. Example: value added tax. (BAR 2001) 3.  Among the taxes imposed by the Bureau of Internal Revenue are income tax, estate and donor’s tax, value-added tax, excise tax, other percentage taxes, and documentary stamp tax. Classify these taxes into direct and indirect taxes, and differentiate direct from indirect taxes. (5%) SUGGESTED ANSWER: Income tax, estate and donor's 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. Direct taxes are demanded from the very person who, as intended, should pay the tax which he cannot shift to another; while an indirect tax is demanded in the first 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. (BAR 2000) 4. Distinguish a direct from an indirect tax.  ANSW  ANSWER ER:: A direct tax 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. An indirect tax 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. Macaraig. 197 SCRA 771) (BAR 1994) II. National Internal Revenue Code (NIRC) of 1997, as amended

1. What kind of taxes, fees and charges are considered as National Internal Revenue Taxes under the National Internal Revenue Code (NIRC)? SUGGESTED ANSWER: The following taxes, fees and charges are considered to be National Internal Revenue Taxes under the National Internal Revenue Code: a) b) c) d) e) f)

Income tax; Estate and donor’s taxes; Value-added tax; Other percentage taxes; Excise taxes; Documentary stamp taxes; and

Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue. (Section 21, NIRC). (BAR 2007) A. Income taxation 1. Income tax systems a. Global tax system 1. Discuss the meaning of the Global and Schedular systems of taxation. Page | 34

 ANSWER: A global system of taxation is one where the taxpayer is required to lump up all items of income earned during a taxable period and pay under a single set of income tax rules on these different items of Income. A schedular system of taxation provides for a different tax treatment of different types of income so that a separate tax return is required to be filed for each type of income and the tax is computed on a per return or per schedule basis. (BAR 1997) 2. Distinguish “schedular treatment" treatment" from “global treatment" as used in income taxation.  ANSW  ANSWER ER:: Distinction between “schedular treatment" and “global treatment’  as used in income taxation: Under a schedular system, the various types/items of income (Le. compensation; business/professional income) are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. Under the global system, 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 subjected to tax at a fixed rate. (BAR 1994) b.Schedular b. Schedular tax system 1. Discuss the meaning of the Global and Schedular systems of taxation.  ANSWER: A global system of taxation is one where the taxpayer is required to lump up all items of income earned during a taxable period and pay under a single set of income tax rules on these different items of Income. A schedular system of taxation provides for a different tax treatment of different types of income so that a separate tax return is required to be filed for each type of income and the tax is computed on a per return or per schedule basis. (BAR 1997) 2. Distinguish “schedular treatment" treatment" from “global treatment" as used in income taxation.  ANSW  ANSWER ER:: Distinction between “schedular treatment" and “global treatment’ as used in income taxation: Under a schedular system, the various types/items of income (Le. compensation; business/professional income) are classified accordingly and are accorded different tax treatments, in accordance with schedules characterized by graduated tax rates. Since these types of income are treated separately, the allowable deductions shall likewise vary for each type of income. Under the global system, 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 subjected to tax at a fixed rate. (BAR 1994) c. Semi-schedular or semi-global tax system 1. To which system would you say that the method of taxation under the National Internal Revenue Code belongs? Page | 35

 ANSWER: The method of taxation under the NIRC belongs to a system which is partly schedular and partly global. (BAR 1997) 2.

Features of the Philippine income tax law

1. What are the basic features of the present income tax system"?  ANSWER: OUT 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. This makes citizens 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 Philippines. Domestic corporations are also taxed on universal income while foreign corporations are taxed only on income from within. b. The individual income tax system is mainly progressive in nature in that it provides a graduated rates of income tax. Corporations in general are taxed at a flat rate of thirty five percent (35%) 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 gross income (Gross compensation income less personal exemptions). Self-employed and professionals are taxed on net income with deductions limited to seven items or in lieu thereof the forty percent (40%) maximum deduction plus the personal exemptions. Corporations are generally taxed on net income except for non-resident foreign corporations which are taxed on gross income. b. The income tax is generally imposed via the self- assessment system or pay-as-you-file concept of imposing the tax although certain incomes, including income of non-residents, are taxed on the pay-asyou-eam concept or the so called withholding tax. c.

The corporate income tax is a one-layer tax in that distribution of profits to stockholders (except to non-residents are not subject to Income tax. (BAR 1996) a. Direct tax b.Progressive c. Comprehensive d.Semi-schedular or semi-global tax system

1. To which system would you say that the method of taxation under the National Internal Revenue Code belongs?  ANSWER: The method of taxation under the NIRC belongs to a system which is partly schedular and partly global. (BAR 1997) 3.

Criteria in imposing Philippine income tax a. Citizenship principle b.Residence principle Page | 36

c. Source principle 1. Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It is not licensed to do business in the Philippines. 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, Philippine Airlines (PAL), a Philippine corporation. KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside the Philippines. The total sales of airline tickets transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding that KIA’s airline ticket sales constit uted income derived from sources within the Philippines. KIA filed a protest on the ground that the P2,968,156.00 should be considered as income derived exclusively from sources outside the Philippines since KIA only serviced passengers outside Philippine territory. Is the position of KIA tenable? Reasons. (4%) SUGGESTED ANSWER: KIA’s position is not tenable. The revenue it derived in 1997 from sales of airplane tickets in the Philippines, through its agent PAL, is considered as income from within the Philippines, subject to the 35% tax based on its taxable income pursuant to Section 25(a)( 1) of the Tax Code of 1977. The transacting of business in the Philippines through its local sales agent, makes KIA a resident foreign corporation despite the absence of landing rights, thus, it is taxable on income derived from within. The source of an income is the property, activity or service that produced the income. In the instant case, it is the sale of tickets in the Philippines which is the activity that produc ed the income. KIA’s income being derived from within is subject to Philippine income tax (CIR v. British Overseas Airways Corporation, 149 SCRA 395, [1987]). Note: The taxable year involved in the problem is 1997, hence, the suggested answer above follows the applicable provision of the old Tax Code (National Internal Revenue Code of1977) then in effect and the prevailing jurisprudence on the matter. However, with the adoption of the National Internal Revenue Code ofl997(RA 8424) which took effect on January 1, 1998, it is expected that the bar candidates have lost track of the change in the tax law which transpired more than a decade ago. For this reason, it is respectfully requested that an answer based on the provisions of the New Tax Code shall be given full credit. Accordingly, an answer framed in this wise should also be considered as a correct answer, viz:  ANOTHER SUGGESTED ANSWER: Yes. KIA is a non-resident foreign corporation which is taxable only on income from within. The income of KIA as an international air carrier is derived from the sale of transportation services. Compensation for services is an income from within if the services are performed in the Philippines (Section 42(A)(3), NIRC). The origination of the flight is determinative of the source of the income of the international air carrier. If the flight originates in the Philippines to a foreign destination, the income is an income from within; if it originates in a foreign country to any destination, the income is from without. In the case at bar, no flight will originate from the Philippines because KIA is not licensed to do business here. Hence, the income is not taxable in the Philippines (Section 28(A)(3)(a), NIRC). (BAR 2009) 2. Caledonia Aircargo is an off-line international carrier without any flight operations in the Philippines. It has, however, a liaison office in the Philippines which is duly licensed with the Securities and Exchange Commission, established for the purpose of providing passenger and flight information, reservation and ticketing services.  Are the revenues of Caledonia Aircargo from tickets reserved by its Philippine office subject to tax? Page | 37

 ANSWER: The revenues in the Philippines of Caledonia Aircargo as an “off -line'’ airline from tick et reservation services are taxable income from “whatever source" under Sec. 28(a) of theTax Code. This case is analogous to Commissioner v. BOAC. G.R No. No. 65773-74, April 30, 1987 where the Supreme Court ruled that the income received in the Philippine s from the sale of tickets by an “off -line" airline is taxable as Income from whatever source. (BAR 1994) 3. Pacific, Inc. is engaged in overseas shipping. It time chartered one of its s hips to a Japanese company on a five- year term. The charter was consummated through the efforts of Kamino Moto, a Tokyo based broker. The negotiation took place in Tokyo. The agreement calls for Pacific, Inc. to pay Kamino Moto $50,000.00. Your opinion is sought whether Pacific, Inc. should withhold the tax before sending the compensation of Kamino Moto.  ANSWER: The compensation of Kamino Moto is not subject to withholding tax. Compensation for labor or personal services performed outside the Philippines are considered as income from sources without the Philippines (Sec. 36 (c) (3) and (a) (3). Kamino Moto’s efforts in consummating the Charter are a form of labor or services. Considering further than Kamino Moto is a Tokyo based broker, presumably a non-resident foreign corporation, it is taxable only on income within the Philippines. Since the contract was consummated in Japan. Kamino Moto’s compensation, therefore, is not subject to withholding tax.  ALTERNATIVE ANSWERS: a) Taxes should not be withheld as the income was derived from an activity outside the country and. therefore, from sources outside the Philippines. It has been held in Commissioner v. Japan Air Lines, 202 SCRA 450 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 the country. The time chartering of the ship occurred outside the Philippine territory. Therefore, income derived therefrom is not subject to income taxes that may be withheld at source. b) Kamino Moto is a non-resident alien not engaged in trade or business in the Philippines. According to

Section 25 of the NIRC, he is liable to pay income tax if the compensation paid by Pacific is compensation income derived from sources within, the Philippines. However, the brokerage service of Kamino Moto was rendered in Tokyo. Applying the source- rule in Section 36 of the NIRC, the income derived by the taxpayer is income derived from sources outside the Philippines. Thus, the compensation of Kamino Moto is not subject to Philippine income tax. Pacific Inc. should not withhold income tax on the payment. (BAR 1993) 4. Newtex International (Phils.) Inc. is an American firm duly authorized to engage in business in the Philippines as a branch office. In its activity of acting as a buying agent for foreign buyers of shirts and dresses abroad and performing liason work between its home office and the Filipino garment manufacturers and exporters. Newt ex does not generate any income. To finance its office expenses here, its head office abroad regularly remits to it the needed amount. To oversee its operations and manage its office here, which had been in operation for two (2) years, the head office assigned three (3) foreign personnel.  Are the three foreign personnel subject to Philippine income tax?  ANSWER: The three (3) foreign personnel are subject to tax on the income that they receive for services rendered in the Philippines. Non-resident aliens are subject to tax on income from sources within the Philippines. Income is deemed derived from sources within the country when it is earned for services rendered in the Philippines (Sec. 22. in relation to Sec. 36, NIRC). (BAR 1991) 4.

Types of Philippine income tax Page | 38

5.

Taxable period a. Calendar period

1.  An individual taxpayer can adopt either the calendar or fiscal period for purposes of filing his income tax return. SUGGESTED ANSWER: FALSE. [Sec. 43, NIRC.] b.Fiscal period 1.  An individual taxpayer can adopt either the calendar or fiscal period for purposes of filing his income tax return. SUGGESTED ANSWER: FALSE. [Sec. 43, NIRC.] c. Short period 6. Kinds of taxpayers a. Individual taxpayers (1) Citizens (2) Aliens (3) Special class of individual employees (iv) Minimum wage earner b.Corporations 1. For failure to comply with certain corporate requirements, the stockholders of ABC Corp. were notified by the Securities and Exchange Commission that the corporation would be subject to involuntary dissolution. The stockholders did not do anything to comply with the requirements, and the corporation was dissolved. Can the stockholders be held personally liable for the unpaid taxes of the dissolved corporation? Explain briefly. (5%) SUGGESTED ANSWER: No. As a general rule, stockholders cannot be held personally liable for the unpaid taxes of a dissolved corporation. The rule prevailing under our jurisdiction is that a corporation is vested bylaw with a personality that is separate and distinct from those of the persons composing it (Sunio v. NLRC, 127 SCRA 390 [1984]). Note: Additional point should be given to the examinee if he answers in the following that: However, stockholders may be held liable for the unpaid taxes of a dissolved corporation if it appears that the corporate assets have passed into their hands (Tan Tiong Bio v. CIR, 4 SCRA 986 [1962D. Likewise, when stockholders 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. (BAR 2004) (i) Domestic corporations (ii) Foreign corporations (iii) Joint venture and consortium

1. Weber Realty Company which owns a three-hectare land in Antipolo entered into a Joint Venture  Agreement (JVA) with Prime Development Company for the development of said parcel of land. Weber Realty as owner of the land contributed the land to the Joint Venture and Prime Development agreed to develop the same into a residential subdivision and construct residential houses thereon. They agreed that they would divide the lots between them. Page | 39

a) Does the JVA entered into by and between Weber and Prime create a separate taxable entity? Explain briefly. SUGGESTED ANSWER: The JVA entered into between Weber and Prime does not create a separate taxable entity. The joint venture is formed for the purpose of undertaking construction projects; hence, is not considered as a corporation for income tax purposes. (Section 22(B), NIRC). (BAR 2007) c. Partnerships d.General professional partnerships 1. Five years ago Marquez, Peneyra, Jayme, Posadas and Manguiat, all lawyers, formed a partnership which they named Marquez and Peneyra Law Offices. The Commissioner of Internal Revenue thereafter issued Revenue Regulation No. 2-93 implementing RA. 7496 known as the Simplified Net Income Taxation Scheme (SNITS). Revenue Regulation No. 2-93 provides in part: “Sec. 6. General Professional Partnership. -The general professional partnership and the partners are covered by RA. 7496. Thus, in determining profit of the partnership, only the direct costs mentioned in said law are to be deducted from partnership income. Also, 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.”

Is Revenue Regulation No. 2-93 now considered as having adopted a gross income method instead of retaining the net income taxation scheme? Explain.  ANSWER: No. Revenue Regulation No. 2-93 implementing RA No. 7496 have indeed significantly reduced the items of deduction by limiting it to direct costs and expenses or the 40% of gross receipts maximum deduction in cases where the direct costs are difficult to determine. The 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 justified by the fact that deductions are not matters of right but are matters of legislative grace. (BAR 1995) e. Estates and trusts 1. Johnny transferred a valuable 10-door commercial apartment to a designated trustee, Miriam, naming in the trust instrument Santino, Johnny’s 10-year old son, as the sole beneficiary. The trustee is instructed to distribute the yearly rentals amounting to P720,000.00. The trustee consults you if she has to pay the annual income tax on the rentals received from the commercial apartment. [a] What advice will you give the trustee? Explain. (3%) SUGGESTED ANSWER: I will advise the trustee that she has nothing to pay in annual income taxes because the trust’s taxable income is zero. This is so because the amount of income to be distributed annually to the beneficiary is a deduction from the gross income of the trust but must be reported as income of the beneficiary (Section 61(A), NIRC). [b] Will your advice be the same if the trustee is directed to accumulate the rental income and distribute the same only when the beneficiary reaches the age of majority? Why or why not? (3%) SUGGESTED ANSWER: Page | 40

No, the trustee has to pay the income tax on the trust’s net income determined annually if the income is required to be accumulated. Once a taxable trust is established , its net income is either taxable to the trust, represented by the trustee, or o the beneficiary depending on the provision for distribution of income following the one-layer taxation scheme (Section 61(A), NIRC). (BAR 2009)

f. Co-ownerships 1. Mr. Santos died Intestate in 1989 leaving his spouse and five children as the only heirs. The estate consisted of a family home and a four-door apartment which was being rented to tenants. Within the year, an extrajudicial settlement of the estate was executed from the heirs, each of them receiving his/her due share. The surviving spouse assumed administration of the property. Each year, the net income from the rental property was distributed to all, proportionately, on which they paid respectively, the corresponding Income tax. In 1994, the income tax returns of the heirs were examined and deficiency income tax assessments were is-sued against each of them for the years 1989 to 1993, inclusive, as having entered into an unregistered partnership. Were the assessments justified?  ANSWER: Yes. the assessments were justified 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 profits for the heirs In proportion to their shares in the inheritance. From 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 making profit 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 (Lorenzo Ona, et at v. CIR, 45 SCRA 74).  ALTERNATIVE ANSWER: No. the assessments are not justified. The mere sharing of income does not of itself establish a partnership absent any dear intention of the co-owners who are only awaiting liquidation of the estate. (BAR 1997) 2. Noel Langit and his brother, Jovy, bought a parcel of land which they registered in their names as pro indiviso owners (Parcel A). Subsequently, they formed a partnership, duly registered with Securities and Exchange Commission, which bought another parcel of land (Parcel B). Both parcels of land were sold, realizing a net profit of PI,000,000.00 for parcel A and P500.000.00 for parcel B. The BIR claims that the sale of parcel A should be taxed as a sale by an unregistered partnership. Is the BIR correct?  ANSWER: The BIR is not correct, since there is no showing that the acquisition of the property by Noel and Jo vy Langit 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. The sale of parcel A shall therefore not be treated as a sale by an unregistered partnership, but an ordinary sale of a capital asset, and hence will be subject to the 5% capital gains tax and documentary stamp tax on transfers of real property, said taxes to be borne equally by the co-owners.  ALTERNATIVE ANSWER: The BIR is correct in treating the gain from the sale of parcel A by Noel and Jovy Langit at a profit of PI,000,000.00. in the case of Pascual and Dragon u. Commissioner, G.R. No. 78133, October 18, 1988, the Page | 41

Supreme Court ruled that the sharing of returns does not in itself establish a partnership, whether or not the persons sharing therein have a joint or common right or interest in the property. The decision in said case cannot be applied here because clearly the parties organized a partnership duly registered with the Securities and Exchange Commission. They pooled their resources together with the purpose of dividing the profit between them. The BIR also claims that the sale of parcel B should be taxed as a sale by a corporation. Is the BIR correct?  ANSWER: The BIR is correct, since a “corporation” as defined under Section 20 (a) of the Tax Code Includes partnerships, no matter how created or organized, except general professional partnerships. The business partnership. In the Instant case, shall therefore be taxed in the same manner as a corporation on the sale of parcel B. The sale shall thus be subject to the creditable withholding tax under Revenue Regulations 1-90, as amended by 12-94, on the sale of parcel B, and the partnership shall report the gain realized from the sale when it files its income tax return. (BAR 1994) 3. Roberto Ruiz and Conrado Cruz bought three (3) parcels of land from Rodrigo Sabado on 4 May 1976. Then on 8 July 1977, they bought two (2) parcels of land from Miguel Sanchez. In 1988, they sold the first three parcels of land to Central Realty, Inc. In 1989, they sold the two parcels to Jose Guerrero. Ruiz and Cruz realized a net profit of P100,000.00 forthesalein 1988 and PI50,000.00for the sale in 1989. The corresponding capital gains taxes were individually paid by Ruiz and Cruz. On 20 September 1990, however, Ruiz and Cruz received a letter from the Commissioner of Internal Revenue assessing them deficiency corporate income taxes for the years 1988 and 1989 because, according to the Commissioner, during said years they, as co-owners in the real estate transactions, formed an unregistered partnership or joint venture taxable as a corporation and that the unregistered partnership was subject to corporate income tax, as distinguished from profits derived from the partnership by them, which is subject to individual income tax.  Are Robert Ruiz and Conrado Cruz liable for deficiency corporate income tax?  ANSWER: Roberto Ruiz and Conrado Cruz are not liable for corporate income tax. Abandoning evidently the Gatchalian rule, the Supreme Court in a recent ruling (Pascual vs. Court of Tax Appeals, G.R No. 78133, 18 Oct. 1988), held that isolated transactions by two or more persons do not warrant their being considered as an unregistered partnership. They will instead be considered as mere co-owners; no corporate income tax is due on mere coownerships. It was, therefore correct for Ruiz and Cruz to merely pay their individual income tax liabilities on the real estate transactions. (BAR 1991)

7.

Income taxation a. Definition b.Nature c. General principles

1. From what sources of income are the following persons/ corporations taxable by the Philippine government? 1. Citizen of the Philippines residing therein; [1%] 2. Non-resident citizen; [1%] 3.  An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker; [1%] 4.  An alien individual, whether a resident or not of the Philippines; [1%] Page | 42

5.  A domestic corporation; [1%) SUGGESTED ANSWER: (Section 23, NIRC of 1997) 1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. 2. A nonresident citizen is taxable only on income derived from sources within the Philippines. 3. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines. 4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. 5. A domestic corporation is taxable on all income derived from sources within and without the Philippines. (BAR 1998)

8.

Income a. Definition b.Nature c. When income is taxable (1) Existence of income (2) Realization of income

1. Weber Realty Company which owns a three-hectare land in Antipolo entered into a Joint Venture  Agreement (JVA) with Prime Development Company for the development of said parcel of land. Weber Realty as owner of the land contributed the land to the Joint Venture and P rime Development agreed to develop the same into a residential subdivision and construct residential houses thereon. They agreed that they would divide the lots between them. b) Are the allocation and distribution of the saleable lots to Weber and Prime subject to income tax and to expanded withholding tax? Explain briefly. SUGGESTED ANSWER: No. The allocation and distribution of the saleable lots to Weber and Prime is a mere return of their capital contribution. The income tax and the expanded withholding tax is not due on a capital transaction because no income is realized from it. (BIR Ruling No. DA-192- 2001, October 17, 2001). c) Is the sale by Weber or Prime of their respective shares in the saleable lots to third parties subject to income tax and to expanded withholding tax? Explain briefly. SUGGESTED ANSWER: Yes. The sale by Weber and Prime of their respective shares to third parties is a closed and completed transaction resulting in the realization of income, subject to income tax and to the expanded withholding tax. (BIR Ruling DA-228-2006) (BAR 2007) 2. On 03 January 1998, X, a Filipino citizen residing in the Philippines, purchased one hundred (100) shares in the capital stock of Y Corporation, a domestic company. On 03 January 2000, Y Corporation declared, out of the profits of the company earned after 01 January 1998, a hundred percent (100%) stock dividends on all stockholders of record as of 31 December 1999 as a result of which X holding in Y Corporation became two hundred (200) shares. Page | 43

 Are the stock dividends received by X subject to income tax? Explain. SUGGESTED ANSWER: No. Stock dividends are not realized income. Accordingly, the different provisions of the Tax Code imposing a tax on dividend income only includes within its purview cash and property dividends making stock dividends exempt from income tax. However, if the distribution of stock dividends is the equivalent of cash or property, as when the distribution results in a change of ownership interest of the shareholders, the stock dividends will be subject to income tax. (Section 24(B)(2); Section 25(A)&(B); Section 28(B)(5)(b), 1997 Tax Code) (BAR 2003) 3. X-land Condominium Corporation was organized by the owners of units in X-land Building in accordance with the Master Deed with Declaration of Restrictions. The X- land Building Corporation, the developer of the building, conveyed the common areas in favor of the X-land Condominium Corporation. Is the conveyance subject to any tax?  ANSWER: The conveyance is not subject to any tax. The same is without consideration, and not in connection with a sale made to X-land Condominium Corporation, 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. The same is not subject to income tax since no income was realized as a result of the conveyance, which was made pursuant to the Condominium Act (R.A. No. 4626, and the purpose of which was merely to vest title to the common areas in favor of the Land Condominium Corporation. There being no monetary consideration, neither is the conveyance subject to the creditable withholding tax imposed under Revenue Regulations 1-90, as amended. The 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 Condominium Act. However, the Deed of Conveyance is subject to documentary stamp tax. N.B. Documentary stamps tax and Condominium Law are excluded from the coverage of the Bar Examinations. (BAR 1994) 4. Cebu Development Inc. (CDI) has an authorized capital stock of P5,000,000,00 divided into 50,000 shares with a par value of One Hundred Pesos (P100.00) per share. Of the authorized capital stock, twenty-five thousand (25,000) shares have been subscribed. Mr. Juan Legaspi is a stockholder of CDI where he has subscription amounting to 13,000 shares. To fully pay his unpaid subscription in the amount of P950.000.00, Mr. Legaspi transferred to the corporation a parcel of land that he owns by virtue of a Deed of Assignment. Upon investigation, the BIR discovered that Mr. Legaspi acquired said property for only P500,000.00. Is Mr. Legaspi liable for any taxable gain?  ANSWER: The transfer by Mr. Legaspi to the corporation of the parcel of land in payment of his unpaid subscription did not increase his stockholdings in the corporation. It cannot be said that he acquired control of the corporation by virtue of the transfer of the land. His percentage of stockholdings in the capital stock of the corporation remains the same after the transfer as before. Therefore, Mr. Legaspi derived taxable gain for his economic gain which was realized by virtue of the exchange of the land for the liability for the subscription.  ALTERNATIVE ANSWER: Mr. Legaspi is not liable for any taxable gain. The transaction amounted to an exchange of shares of property Page | 44

for shares of stock as a result of which the property transferor acquired control of the corporation. The 13,000 shares of stock acquired in exchange of property was more than fifty percent (50%) of the total subscribed capital stock of Cebu Development, Inc. (CDI) that qualified the transaction as a tax-exempt under the provisions of Sec. 34 (c) (2) of the National Internal Revenue Code. Is the CDI liable for any taxable gain?  ANSWER: CDI Itself Is not liable for any taxable gain since subscription payments are not considered as taxable income being merely investments in the corporation. However, a taxable incidence may occur as and when the corporation sells the parcel of land for a price over and above the value of the shares of stock or in this case over and above P950,000.00. Until such time, however, there is no realizable income on the part of the corporation. (BAR 1991) (3) Recognition of income (4) Methods of accounting d.Tests in determining whether income is earned for tax purposes (1) Realization test (2) Claim of right doctrine or doctrine of ownership, command, or control 1. Mr. Lajojo is a big-time swindler. In one year he was able to earn PI Million from his swindling activities. When the Commissioner of Internal Revenue discovered his income from swindling, the Commissioner assessed him a deficiency income tax for such income. The lawyer of Mr. Lajojo protested the assessment on the following grounds: 1) The income tax applies only to legal income, not to illegal income: 2) Mr. Lajojo’s 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 peso; and How will you rule on each of the three grounds for the protest? Explain.  ANSWER: 1) The contention that the income tax applies to legal income and not to illegal income is not correct. Section 28(a) of the Tax Code includes within the purview of gross income all income from whatever source derived. Hence, the illegality of the income will not preclude the imposition of the income tax thereon. The contention that the receipts from his swindling did not constitute income because of his obligation to return the amount swindled is likewise not correct. When a taxpayer acquires 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 adjudged to restore its equivalent (James us. U.S.,366 U.S. 213, 1961). To treat the embezzled funds not as taxable Income would perpetuate injustice by relieving embezzlers of the duty of paying income taxes on the money they enrich themselves with through embezzlement, while honest people pay their taxes on every conceivable type of income. (Janies us. U.S.) (BAR 1995) (3) Economic benefit test, doctrine of proprietary interest (4) Severance test (5) All events test 1. What is the “all event test”? Explain Briefly. (2%) Page | 45

SUGGESTED ANSWER: The “all events test” is a test applied in the realization of income and expense by an accrual -basic taxpayer. The test requires (1) the fixing to the right to the income or liability to pay; and (2) the availability of reasonably accurate determination of such income or liability, to warrant the inclusion of the income or expense I the gross income or deductions during the taxable year. (CIR v. Isabela Cultural Corporation, GR No. 172231, Feb 12, 2007). 2. YYY Corporation engaged the services of the Manananggol Law Firm in 2006 to defend the corporation’s title over a property used in the business. For the legal services re ndered in 2007, the law firm billed the corporation only in 2008. The corporation duly paid. YYY Corporation claimed this expense as a deduction from gross income in its 2008 return, because the exact amount of the expense was determined only in 2008. Is YYY’s claim of deduction proper? Reasons. (4%) SUGGESTED ANSWER: No. The expense is deductible in the year it complies with the all-events test. The test is considered met if the liability is fixed, and the amount of such liability is determined with reasonable accuracy. The liability to pay is already fixed in 2007 when the services were rendered, and the amount of such liability is determinable with reasonable accuracy in the same year. Hence the deduction should have been claimed in 2007 and not in 2008. (CIR v. Isabela Cultural Corporation, SIS SCRA 556 [2007]). (BAR 2009) 9.

Gross income a. Definition

1. Congress enacts a law imposing a 5% tax on the gross receipts of common carriers. The law does not define the term “gross receipts". Express Transport, Inc., a bus company plying the Manila -Baguio route, has time deposits with ABC Bank. In 2005, Express Transport earned PI Million interest, after deducting the 20% final withholding tax from its time deposits with the bank. The BIR wants to collect a 5% gross receipts tax on the interest income of Express Transport without deducting the 20% final withholding tax. Is the BIR correct? Explain. 5% SUGGESTED ANSWER: Yes. The term “gross receipts” is broad enough to include income not physically received but constructively received by the taxpayer. After all, the amount withheld is paid to the government on its behalf, in satisfaction of its withholding taxes. The fact that it did not actually receive the amount does not alter the fact that it is remitted for its benefit in satisfaction of its tax obligations. Since the income withheld is an income owned by Express Transport, the same forms part of its gross receipts. (CIR v. Bank of Commerce, 459 SCRA 638 (20051; CIR v. Solidbank Corp., 416 SCRA 436 [2003]; cm v. China Bank, 403 SCRA 634 [20030. (BAR 2006) 2. What is "gross income" for purposes of the Income tax?  ANSWER: Gross Income means all income from whatever source derived, including (but not limited to) compensation for services, including fees, commissions, and similar items; gross Income from business; gains derived from dealings in property; interest: rents: royalties; dividends; annuities; prizes and winnings; pensions; and partner’s distributive share of the gross income of general professional partnership (Sec. 28, NIRC).  ALTERNATIVE ANSWER: Gross income means all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of income specifically described as gains and profits including gains derived from the sale or other disposition of capital. Page | 46

Gross income means Income (in the broad sense) less income which is, by statutory provision or otherwise, exempt from the tax imposed by law (Sec. 36, Rev. Reg. No. 2) Gross income from business means total sales, less cost of goods sold, plus any Income from investments and from incidental or outside operations or sources (Sec. 43, Rev. Reg. No. 2). (BAR 1995) 3. How does “income" differ from “capital"? Explain.  ANSWER: Income differs from capital in that income 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. Therefore, capital is fund while income is the flow. Capital is wealth, while income is the service of wealth. Capital is the tree while income is the fruit (Vicente Madrigal, et al v. James Rafferty, 38 Phil. 414). (BAR 1995) 4. In 1990, X started constructing a commercial building with spaces for lease to the public. X required Y, a prospective lessee to sign a pre-lease agreement, which principally provided: (a) that the lessee shall extend to the lessor a noninterest bearing loan of P100,000.00 payable within twelve (12) months: and (b) that in consideration of the loan, the lessee shall be given preference in the lease and his rentals shall not be increased while the loan remains unpaid. Upon completion of the building, Y extended the loan ofP100.000.00 to X and he was given a space in its ground floor. May the BIR consider the P100,000.00 as taxable income of X. Reasons.  ANSWER: Sec. 28 of the NIRC defines gross income as all income from whatever source derived including but not limited to the following items. a) b) c) d) e) f) g) h) i) j) k)

Compensation for services, including fees, commissions, and similar items; Gross income derived from business; Gains derived from dealings in property: Interest; Rents; Royalties; Dividends; Annuities Prizes and winnings; Pensions; and Partner’s distributive share of the gross income of general professional partnership.

Further, under Sec. 36 of Revenue Regulations No. 2, taxable income in a broad sense means all wealth which flows into the taxpayer other than as a mere return of capital. It includes the forms of the income specifically described as gains and profits, including gains derived from the sale or other disposition of assets. Gross income, means income (in the broad sense) less income which is by statutory provision or otherwise exempt from the tax imposed by law. Applying the above provision of law to the case at bar, the amount of P 100,000.00 being a loan or indebtedness is an outlay, not a taxable income or gain. (BAR 1993)  ALTERNATIVE ANSWER: The PI 00,000.00 may not be considered taxable income of X. as the same is only a loan that would eventually have to be paid. To the extent that X saved in interest payments, the reasonable value thereof may perhaps be considered as income to X. but the loan, however, may not strictly be considered interest-free as value therefor was given by X in return. b.Concept of income from whatever source derived Page | 47

c. Gross income vis-à-vis net income vis-à-vis taxable income 1. What is meant by taxable income? (2%) SUGGESTED ANSWER: Taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/ or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws. (Sec. 31. NIRC of 1997) (BAR 2000) d.Classification of income as to source (1) Gross income and taxable income from sources within the Philippines 1. Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It is not licensed to do business in the Philippines. 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, Philippine Airlines (PAL), a Philippine corporation. KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside the Philippines. The total sales of airline tickets transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding that KIA’s airline ticket sales constituted income derived from sources within the Philippines. KIA filed a protest on the ground that the P2,968,156.00 should be considered as income derived exclusively from sources outside the Philippines since KIA only serviced passengers outside Philippine territory. Is the position of KIA tenable? Reasons. (4%) SUGGESTED ANSWER: KIA’s position is not tenable. The revenue it derived in 1997 from sales of airplane tickets in the Philippines, through its agent PAL, is considered as income from within the Philippines, subject to the 35% tax based on its taxable income pursuant to Section 25(a)( 1) of the Tax Code of 1977. The transacting of business in the Philippines through its local sales agent, makes KIA a resident foreign corporation despite the absence of landing rights, thus, it is taxable on income derived from within. The source of an income is the property, activity or service that produced the income. In the instant case, it is the sale of tickets in the Philippines which is the activity that produced the income. KIA’s income being derived from within, is subject to Philippine income tax (CIR v. British Overseas Airways Corporation, 149 SCRA 395, [1987]). Note: The taxable year involved in the problem is 1997, hence, the suggested answer above follows the applicable provision of the old Tax Code (National Internal Revenue Code of1977) then in effect and the prevailing jurisprudence on the matter. However, with the adoption of the National Internal Revenue Code ofl997(RA 8424) which took effect on January 1, 1998, it is expected that the bar candidates have lost track of the change in the tax law which transpired more than a decade ago. For this reason, it is respectfully requested that an answer based on the provisions of the New Tax Code shall be given full credit. Accordingly, an answer framed in this wise should also be considered as a correct answer, viz:  ANOTHER SUGGESTED ANSWER: Yes. KIA is a non-resident foreign corporation which is taxable only on income from within. The income of KIA as an international air carrier is derived from the sale of transportation services. Compensation for services is an income from within if the services are performed in the Philippines (Section 42(A)(3), NIRC). The origination of the flight is determinative of the source of the income of the international air carrier. If the flight originates in the Philippines to a foreign destination, the income is an income from within; if it originates in a foreign country to any destination, the income is from without. In the case at bar, no flight will originate from Page | 48

the Philippines because KIA is not licensed to do business here. Hence, the income is not taxable in the Philippines (Section 28(A)(3)(a), NIRC). (BAR 2009) 2. During the year, a domestic corporation derived the following items of revenue: (a) gross receipts from a trading business: (b) interests from money placements in the banks; (c) dividends from its stock investments in domestic corporations; (d) gains from stock transactions through the Philippine Stock Exchange; (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?  ANSWER: The gross receipts from trading business is includible as an item of income in the corporate income tax return and subject to corporate income tax rate based on net income. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20%; dividends from domestic corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. The 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.  ALTERNATIVE ANSWER: The gross receipts from trading business are includible as an item of income in the corporate income tax return. Likewise, the gain or loss realized as a consequence of the receipt of proceeds under an insurance policy on the loss of goods will be included in the corporate income tax return either as a taxable gain or a deductible loss. The gain or loss is arrived at by deducting from the proceeds of insurance (amount realized) the basis of the good lost (Sec. 34(a). NIRC). The net income of the corporation shall be subject to corporate income tax rate of 35%. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20%; dividends from Domestic Corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. (BAR 1997) (2) Gross income and taxable income from sources without the Philippines 1. Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manages their business, filed a joint income tax return for 1997 on March 15.1998. After an audit of the return, the BIR issued on April 20, 2001 a deficiency income tax assessment for the sum of P250,000.00, inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on  August 19,2001 warrants of distraint and levy to enforce collection of the tax. What is the rule of income taxation with respect to Mr. Sebastian's income in 1997 as a seaman on board the Norwegian vessel engaged in international shipping? Explain your answer. (2%) SUGGESTED ANSWER: The income of Mr. Sebastian as a seaman is considered as income of a non-resident citizen derived from without the Philippines. The total gross income, in US dollars (or if in other foreign currency, its dollar equivalent) 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). He is entitled to deduct from his dollar gross income a personal exemption of $4,500 and foreign national Income taxes paid to arrive at his adjusted income during the year. His adjusted income will be subject to the graduated’ tax rates of 1% to 3%. (Sec. 21(b), Tax Code of 1986[PD 1158], as amended by PD 1994). Page | 49

Note: The bar candidates are not expected to be familiar with tax history. Considering that this is already the fourth year of implementation of the Tax Code of 1997, bar candidates were taught and prepared to answer questions based on the present law. It is therefore requested that the examiner be more lenient in checking the answers to this question. Perhaps, an answer based on the present law be given full credit. (BAR 2002) (3) Income partly within or partly without the Philippines e. Sources of income subject to tax (1) Compensation income 1. JR was a passenger of an airline that crashed. He survived the accident but sustained serious physical injuries which required hospitalization for 3 months. Following negotiations with the airline and its insurer, an agreement was reached under the terms of which JR was paid the following amounts: P500, 000.00 for his hospitalization: P250, 000.00 as moral damages: P300, 000.00 for loss of income during the period of his treatment and recuperation. In addition, JR received from his e mployer the amount of P200,000.00 representing the cash equivalent of his earned vacation and sick leaves. Which, if any, of the amounts he received are subject to income tax? Explain. (5%) SUGGESTED ANSWER: The amount of P200,000.00 that JR received from his employer is subject to income tax except the money equivalent of ten (10) days unutilized vacation leave credits which is not taxable. Amounts of vacation allowances or sick leave credits which are paid to an employee constitutes compensation (Sec. 2.78(A)(7), RR No. 2-98, as amended by RR No. 10-2000). The amounts that JR received from the airline are excluded from gross income and not subject to income tax because they are compensation for personal injuries suffered from an accident as well as damages received as a result of an agreement (negotiation) on account of such injuries. (Sec. 32(B)(4), NIRC). (BAR 2005) 2. X, a multinational corporation doing business in the Philippines donated 100 shares of stock of said corporation to Mr. Y, its resident manager in the Philippines.  Assuming the shares of stocks were given to Mr. Y in consideration of his services to the corporation, what are the tax implications? Explain.  ANSWER: If the shares of stocks were given to Mr. Y 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, subject to income tax. The par value or stated value of the shares issued also constitutes deductible expense to the corporation provided it is subjected to withholding tax on wages. (BAR 1996) 3. Mr. Osorio, a bank executive, while playing golf with Mr. Perez, a manufacturing firm executive, mentioned to the latter that his (Osorio) bank had just opened a business relationship with a big foreign importer of goods which Perez' company manufactures. Perez requested Osorio to introduce him to this foreign importer and put in a good word for him (Perez), which Osorio did. As a result, Perez was able to make a profitable business deal with the foreign importer. In gratitude Perez, in behalf of his manufacturing firm, sent Osorio an expensive car as a gift. Osorio called Perez and told him that there was really no obligation on the part of Perez or his company, to give such an expensive gift. But Perez insisted that Osorio keep the car. The company of Perez deducted the cost of the car as a business expense. Page | 50

The Commissioner of Internal Revenue included the fair market 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 Commissioner or Osorio? Explain.  ANSWER: The Commissioner is correct. The car having been given to Mr. Osorio in consideration of having introduced Mr. Perez to a foreign Importer which resulted to a profitable business deal is considered to be a compensation for services rendered. The transfer is not a gift because it is not made out of a detached or disinterested generosity but for a benefit accruing to Mr. Perez. The fact that the company of Mr. Perez takes a business deduction for the payment indicates that it was considered as a pay rather than a gift. Hence, the fair market value of the car is includable in the gross Income pursuant to Section 28(a)(1) of the Tax Code (See 1974 Federal Tax Handbook, p. 145). A 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 payor is anticipated, is a taxable income to the payee even if characterized as a ‘gift’ by the payor (Commissioner vs. Duberstein, 363 U.S. 278).  ALTERNATIVE ANSWER: Mr. Osorio is correct. The car was not payment for services rendered. There was no prior agreement or negotiations between Mr. Osorio and Mr. Perez that the former will be compensated for his services. Mr. Perez, in behalf of his company, gave the car to Mr. Osorio out of gratitude. The transfer having been made gratuitously should be treated as a gift subject to donor’s tax and should be excluded from the gross income of the recipient, Mr. Osorio. The Commissioner should cancel the assessment of deficiency income tax to Mr. Osorio and instead assess deficiency donor’s tax on Mr Perez’ company. (Sec. 28(b)(3), NIRC; Pirovano vs. Commissioner. (BAR 1995) 4. Mr. Quiroz worked as chief accountant of a hospital for forty-five years. When he retired at 65 he received retirement pay equivalent to two months’ salary for every year of service as provided in the hospital BIR approved retirement plan. The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was provided for in the hospital's retirement plan in view of his loyalty and invaluable services for fortyfive years; hence, it resolved to pay him a gratuity of P1 Million over and above his retirement pay. The Commissioner of Internal Revenue taxed the P1 Million as part of the gross compensation income of Quiroz who protested that it was excluded from income because it was a gift. Is Mr. Quiroz correct in claiming that the additional PI Million was gift and therefore excluded from income? Explain.  ANSWER: No. The 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. Under the employer’s ‘motivation test,’ emphasis should be placed on the value of Mr. Quiroz services to the company as the compelling reason for giving him the gratuity, hence it should constitute a taxable income. The payment would only qualify as a gift if there is nothing but ‘good will, esteem and kindness' which motivated the employer to give the gratuity. (Stanton vs. U.S., 186 F. Supp. 393). Such is not the case in the herein problem.  ALTERNATIVE ANSWER: Yes. The 1 million is not compensation income subject to income tax but a gift from his employer. There was no evidence presented to show that he was not fully compensated for his 45 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. The PI million is purely a gratuity from the company. It is a taxable gift to the transferor. Under the Tax Code, gifts are Page | 51

excluded from gross income therefore exempt from income tax. (Sec. 28(b)(3). NIRC; Pirovano vs. Commissioner) (BAR 1995) 5. In December 1993, the Sangguniang Bayan authorized a Christmas bonus of P3,000.00, a cash gift of P5,000.00, and transportation and representation allowance ofP6,000.00 for each of the municipal employees. (a) Is the Christmas bonus subject to any tax? (b) How about the cash gift? (c) How about the transportation and representation allowances?  ANSWER: (a) The Christmas bonus given by the Sangguniang Bayan to the municipal employees is taxable as additional compensation (Sec. 21 (a). Tax Code). (b) The cash gift per employee of P5.000.00 being substantial may be considered taxable also. They partake the nature of additional compensation income as it is highly doubtful if municipal governments are authorized to make gifts in substantial sums such as this. They are not further more gifts of “small value” which employers might give to their employees on special occasions like Christmas - items which could be exempt under BIR Revenue Audit Memo No. 1-87. (c) The transportation and representation allowances are actually reimbursements for expenses incurred by the employee for the employer. Said allowances spent by the employee for the employer are designed to enhance the quality of the service that the employer is supposed to perform for its clientele like the people of the municipality. (BAR 1994) 6. The employees of Travellers, Inc. staged a strike. X, a non-union, member joined the strike and volunteered to picket the company premises from 8:00 A.M. to 12:00 P.M., Monday to Friday. Six months into the strike. X ran out of money and asked financial aid from the union since he has no other source of income and needed financial assistance in order to live. The union gave him PI ,000.00 a month to take care of his food requirements plus P500.00 to take care of his monthly rent. When X filed his return, he excluded these benefits from his gross income. The exclusion was denied by the BIR Decide.  ANSWER: The PI,500.00 is not compensation income because compensation income arises out of employer-employee relationship as payment for services without compensation. The P1.500.00 is a gift from the labor union. According to Section 28 (b) (3) of the NIRC, gifts are to be excluded from gross income. Thus, the BIR's denial is not valid.  ALTERNATIVE ANSWER: Under the law, gross Income consists of all gains, profits, and income of the taxpayer during a taxable year of whatever kind and in whatever form derived from any source, whether legal or illegal, except items of gross income subject to final income tax and income exempt from taxation under Sec. 28 (b) of the NIRC. Moreover, in the case of Guitierrez vs. Collector of Internal Revenue. CTA Case No. 65. 31 August 1965, it was held that the phrase income from whatever source derived covers all other forms of income. It discloses a legislative policy to include all income not expressly exempted, as within the class of taxable income under our laws, irrespective of the voluntary or involuntary action of the taxpayer in producing the gain. Therefore based on the foregoing considerations, the benefits subject in the case at bar, not expressly exempted by law, are considered as income. (BAR 1993) 7. Oriental, Inc. holds a proprietary share of Capital Gold Club, Inc. It assigned without any consideration this share to X, one of its foreign consultants, to enable him to use its facilities for the duration of his stay in the Philippines. X signed a Declaration of Trust where he acknowledged that the share is owned by Oriental, Inc. and where he promised to transfer the same to whoever will succeed him as consultPage | 52

ant. When X’s contract with Oriental, Inc. expired, he left the Philippines and assigned for free the share to Y, his successor in office. What tax, if any, can be imposed by the BIR on the transaction?

 ANSWER: The BIR cannot impose any tax because there was no real transfer of the ownership of the subject Capitol Golf Club, Inc. (“Capitol”) proprietary share from X to Y. Oriental. Inc. is the true owner of the Capitol proprietary share. It remained the t rue owner from the time of the Capitol share’s use by X, to the transfer of the Capitol share’s use to Y. Oriental remained the legal owner thereof all throughout, while X and Y are only the beneficial owners.  ALTERNATIVE ANSWERS: a) The value of the use of the share may be considered compensation income to both X and Y subject to income tax. The revocable trust may not be considered a disposition of a share of stock subject to capital gains tax. b) Since the transfer does not involve any consideration, X is not subject to income tax. While the transfer is gratuitous, there is no donative intent. Thus, the transaction is not subject to donor’s tax. However, since the certificate is evidence of interest in the Property of a corporation, the transfer of the said certificate is subject to the documentary stamp tax of P0.20 on each P200 or fractional part thereof, of the face value of such certificate, in accordance with Section 178 of the NIRC (BIR Ruling 235-89). c) If the BIR puts value to the playing rights, then the transfer to the expatriate, that value could be treated as compensation to the expatriate, hence, taxable. (BAR 1 993) 8.  ABC Computer Corp. purchased some years ago Membership,Certificate No. 7 from the Calabar Golf Club, Inc. for P300.000.00. In 4 September 1985, it transferred the same to Mr. John Johnson, its  American computer consultant, to enable him to avail of the facilities of the Club during his stay here. The consultancy agreement expired two (2) years later. In the meantime, the value of the Club share appreciated and what was purchased by the corporation at P300,000.00, commanded a market value of P800.000.00 in 1987. Before he returned home a few days after his tenure ended, Mr. Johnson transferred the subject share to Mr. Robert James, the new consultant of the firm and the newly designated playing representative, under a Deed of Declaration of Trust and Assignment of Shares wherein the former acknowledged the absolute ownership of ABC Computer Corp. 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. Is the assignment/transfer of the shares from Johnson to James subject to Income tax?  ANSWER: The assignment or transfer of shares from Johnson to James is not subject to income tax. There had been no real change of ownership that took place. There having been no actual sale or exchange, no income tax incidence can be said to have occurred, in addition, there was really no income realized or received considering that in the Deed of Declaration of Trust and Assignment of Shares, the absolute ownership of ABC Computer Corporation was explicitly recognized. (BAR 1991) 9. Z is a Filipino immigrant living in the United States for more than 10 years. He is retired and he came back to the Philippines as a balikbayan. Every time he comes to the Philippines, he stays here for about a month. He regularly receives a pension from his former employer in the United States, amounting to US$1,000 a month. While in the Philippines, with his pension pay from his former employer, he purchased three condominium units in Makati which he is renting out for P15,000 a month each. Does the US$1,000 pension become taxable because he is now residing in the Philippines? Reason briefly. SUGGESTED ANSWER: Page | 53

No, the US$1,000 pension is excluded from gross income because it is received by a Filipino resident or nonresident from a foreign private institution which under Section 32(B)(6) of the NIRC is excluded from gross income.  Alternative Answer: No, the US$1,000 pension is excluded from gross income because it is derived from sources outside of the Philippines by a non-resident citizen. He may only be taxed for income from sources within the Philippines. (Section 42[A][3] in relation to Section 23, NIRC) (BAR 2007) 10. Z is a Filipino immigrant living in the United States for more than 10 years. He is retired and he came back to the Philippines as a balikbayan. Every time he comes to the Philippines, he stays here for about a month. He regularly receives a pension from his former employer in the United States, amounting to US$1,000 a month. While in the Philippines, with his pension pay from his former employer, he purchased three condominium units in Makati which he is renting out for P15,000 a month each. Will Z be liable to pay income tax on the P45.000 monthly income? Reason briefly. SUGGESTED ANSWER: Yes. The rental income from property located in the Philippines is considered as income derived from within. Z, a non-resident citizen is taxable on income derived from sources within the Philippines. (Section 42 in relation to Section 23, NIRC). (BAR 2007) (2) Fringe benefits 1. Nutrition Chippy Corporation gives all its employees (rank and file, supervisors and managers) one sack of rice every month valued at P800 per sack. During an audit investigation made by the Bureau of Internal Revenue (BIR), the BIR assessed the company for failure to withhold the corresponding withholding tax on the amount equivalent to the one sack of rice received by all the employees, contending that the sack of rice is considered as additional compensation for the rank and file employees and additional fringe benefit for the supervisors and managers. Therefore, the value of the one sack of rice every month should be considered as part of the compensation of the rank and file subject to tax. For the supervisors and managers, the employer should be the one assessed pursuant to Section 33 (a) of the NIRC. Is there a legal basis for the assessment made by the BIR? Explain your answer. SUGGESTED ANSWER: There is no legal basis for the assessment. The one sack of rice given to the supervisors and managers are considered de minimis fringe benefits considering that the value per sack does not exceed PI,000, hence exempted from the fringe benefits tax. (Section 33, NIRC as implemented by RR No. 10-2000). The one sack of rice per month given to the rank and file employees is, likewise, not subject to tax as part of compensation income. This is a benefit of relatively small value intended to promote the health, goodwill, contentment and efficiency of the employee which will not constitute taxable income of the recipient. (Section 2.78.1(A)(3) of RR No. 2-98). (BAR 2007) 2. State with reasons the tax treatment of the following in the preparation of annual- income tax returns: De minimis benefits; SUGGESTED ANSWER: De minimis benefits are non-taxable fringe benefits. They are not to be reported in the income tax return because they are tax exempt. They are also exempt from the imposition of the fringe benefits tax. (Sec. 33(C), NIRC). (BAR 2005) Page | 54

3.  A “fringe benefit’ is defined as being any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee. Would it be the employer or the employee who is legally required to pay an income tax on it? Explain. SUGGESTED ANSWER: It is the employer who is legally required to pay an income tax on the fringe benefit. The fringe benefit tax is imposed as a final withholding tax placing the legal obligation to remit the tax on the employer, such that, if the tax is not paid the legal recourse of the BIR is to go after the employer. Any amount or value received by the employee as a fringe benefit is considered tax paid hence, net of the income tax due thereon. The person who is legally required 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. (BAR 2003) 4. X was hired by Y to watch over Y’s fishponds with a salary of Php 10,000.00. To 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 fishponds. Is the fair market value of the use of the small hut by X a "fringe benefit" that is subject to the 32% tax imposed by Section 33 of the National Internal Revenue Code? Explain your answer. (5%) SUGGESTED ANSWER: No. X is neither a managerial nor a supervisory employee. Only managerial or supervisory employees are entitled to a fringe benefit subject to the fringe benefits tax. Even assuming that he is a managerial or supervisory employee, the small hut is provided for the convenience of the employer, hence does not constitute a taxable fringe benefit. (Section 33, NIRC). (BAR 2001) 5. X is employed as a driver of a corporate lawyer and receives a monthly salary of P5,000.00 with free board and lodging with an equivalent value of P1,500.00. 1) What will be the basis of X’s income tax. 2) Will your answer in question (a) be the same if X's employer is an obstetrician? Why?  ANSWER: 1) The basis of X’s incom e tax would depend on whether his employer is an employee or a practising corporate lawyer. If his employer is an employee, the basis of X’s income tax is P6,500.00 equivalent to the total of the basic salary and the value of the board and lodging. This is so because the employer/corporate 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), X should be taxed only on P5.000.00 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 X as a condition for employment. 2) If the employer is an obstetrician who is self- employed, the basis of X’s income will only be P5.000.00 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 required to be accepted by X as condition for employment. Otherwise, X would be taxed on P6.500.00. (BAR 1996) 6. Mr. Adrian is an executive of a big business corporation. Aside from his salary, his employer provides him with the following benefits: 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 benefits, if any, must Mr. Adrian report as income? Explain.  ANSWER: Mr. Adrian must report the imputed rental value of the house and limousine as income. If the rental value exceeds the personal needs of Mr. Adrian because he is expected to provide accommodation in said house for company guests or the car is used partly for business purpose, then Mr. Adrian is entitled only to a ratable rental value of the house and limousine as exclusion from gross income and only a reasonable amount should Page | 55

be reported as income. This is because the free housing and use of the limousine are given partly for the convenience and benefit of the employer (Collector vs. Henderson).  ALTERNATIVE ANSWER: Remuneration for service although not given in the form of cash constitutes compensation income. Accordingly, the value for the use of the residential house is part of his compensation income which he must report for income tax purposes. However, if the residential house given to Mr. Adrian for his free use as an executive is also used for the benefit of the corporation/employer, such as for entertaining customers of the corporation, only 50% of the rental value or depreciation (if the house is owned by the corporation) shall form part of compensation income (RAMO 1-87). The free use of a limousine and the membership in a country dub is not part of Mr. Adrian's compensation income because they were given for the benefit of the employer and are considered to be necessary incidents for the proper performance of his duties as an executive of the corporation. The membership fee in the country club needs to be reported as income. It appears that the membership of Mr. Adrian to the country club is primarily for the benefit and convenience of the employer. This is to enable Mr. Adrian to entertain company guests (Collector vs. Henderson). (BAR 1995) 7. Capt. Canuto is a member of the Armed Forces of the Philippines. Aside from his pay as captain, the government gives him free uniforms, free living quarters in whatever military camp he is assigned, and free meals inside the camp.  Are these benefits income to Capt. Canuto? Explain.  ANSWER: No, the free uniforms, free living quarters and the free meals inside the camp are not income to Capt. Canuto because these are facilities or privileges furnished by the employer for the employer's convenience which are necessary incidents to proper performance of the military personnel's duties. (BAR 1995) 8. X is employed as security guard of Excel Supermarket, Inc. X lives in a room within the compound of Excel but he is not charged any rent. The rental value of the room is P300.00 a month. X wants your opinion on whether BIR can tax the value of the free use of his room.  ANSWER: The rental value of the room is not taxable. Section 2.2 of the Revenue Audit Memo Order No. 1-87 provides that if the lodging is furnished in the business premises of the employer and the employee is required to accept such lodging as a condition of his employment, then the value of said lodging will be not taxable. It is merely for the convenience, comfort and pleasure of the employer.  ALTERNATIVE ANSWER: a) The BIR may not tax the value of the free use of the room, as the same may not strictly be considered compensation income. Considering the nature of X’s employment and the fact that free lodging was furnished within the business premises, it may reasonably be said that the benefit therefrom inured to the employer more than to X and thus may not actually be considered remuneration for services included in the computation of taxable income. b) It depends. If the lodging furnished to employee-X is within the business premises of the employer and the

employee is required to accept the lodging as condition for employment the imputed rental value of the room used by X shall be excluded from X's compensation income (BIR Audit Memo 1-87). (BAR 1993) (3) Professional income (4) Income from business Page | 56

1. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for PI00,000. This property has a current fair market value of P10 million in view of the construction of a concrete road traversing the property. Juan Gonzales agreed to exchange his agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a fair market value of P10 million, owned by  Alpha Corporation, a domestic corporation engaged in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for P9 million. c) Is Alpha Corporation subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain. (3%) SUGGESTED ANSWER: c) Yes. The gain from the exchange constitutes an item of gross income, and being a business income, it must be reported in the annual income tax return of Alpha Corporation. From the pertinent items of gross income, deductions allowed by law from gross income can be claimed to arrive at the net income which is the tax base for the corporate income tax rate of 35%. (Section 27 (A) and Section 31, NIRC). (BAR 2008) (5) Income from dealings in property 1. Explain briefly whether the following items are taxable or non- taxable: b) Gain arising from expropriation of property: SUGGESTED ANSWER: Taxable. There is a material gain, not excluded by law, realized out of a closed and completed transaction. Gains from dealings in property are part of gross income. (Sec. 32(A)(3), NIRC). e) Gain on the sale of a car used for personal purposes. (5%) SUGGESTED ANSWER: Gain on the sale of a car used for personal purposes is taxable. This is a gain derived from dealings in property which is part of the taxpayer's gross income. (Sec. 32(A)(3), NIRC). There is a material gain, not excluded by law, realized out of a closed and completed transaction. (BAR 2005) 2. State with reasons the tax treatment of the following in the preparation of annual- income tax returns: Income realized from sale of (i) capital assets; and (ii) ordinary assets. (5%) SUGGESTED ANSWER: (i) Generally, income realized from the sale of capital assets are not to be reported in the income tax return as they are already subject to final taxes (capital gains tax on real property and shares of stocks). What are to be reported in the annual income tax return are the capital gains derived from the disposition of capital assets other than real property or shares of stocks in domestic corporations which are not subject to final taxes. (ii) Income realized from the sale of ordinary assets is taxable and the said income shall be declared in the annual income tax return. The income constitutes either income derived from the conduct of trade or business or a gain derived from dealings in property. (Sec. 32 A(2) and (3), NIRC). (BAR 2005) (i) Types of properties

1. Distinguish a “capital asset" from an “ordinary asset". SUGGESTED ANSWER: The term “capital asset” regards all properties not specifically excluded in the statutory definition of capital assets, the profits or loss on the sale or the exchange of which are treated as capital gains or Page | 57

capital losses. Conversely, all those properties specifically excluded are considered as ordinary assets and the profits or losses realized must have to be treated as ordinary gains or ordinary losses.  Accordingly, “capital assets” 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 consequently considered “ordinary assets”: (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; (2) property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business; (3) property used in the trade or business of a character which is subject to the allowance for depreciation provided in Section 34 (F) of the Tax Code or (4) real property used in trade or business of the taxpayer. The statutory definition 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. (BAR 2003)

a) Ordinary assets 1. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for PI00,000. This property has a current fair market value of P10 million in view of the construction of a concrete road traversing the property. Juan Gonzales agreed to exchange his agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a fair market value of P10 million, owned by  Alpha Corporation, a domestic corporation engaged in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for P9 million. a) What is the nature of the real properties exchanged for tax purposes - capital asset or ordinary asset? Explain (3%) SUGGESTED ANSWER: a) The one hectare agricultural land owned by Juan Gonzales is a capital asset because it is not a real property used in trade or business. The one-half hectare residential property owned by Alpha Corporation is an ordinary asset because the owner is engaged in the purchase and sale of real property. (Section 39, NIRC, Revenue Regulations No. 7-03). (BAR 2008) b) Capital assets 1. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for PI00,000. This property has a current fair market value of P10 million in view of the construction of a concrete road traversing the property. Juan Gonzales agreed to exchange his agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a fair market value of P10 million, owned by  Alpha Corporation, a domestic corporation engaged in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for P9 million. a) What is the nature of the real properties exchanged for tax purposes - capital asset or ordinary asset? Explain (3%) SUGGESTED ANSWER: a) The one hectare agricultural land owned by Juan Gonzales is a capital asset because it is not a real property used in trade or business. The one-half hectare residential property owned by Alpha Corporation is an ordinary asset because the owner is engaged in the purchase and sale of real property. (Section 39, NIRC, Revenue Regulations No. 7-03). (BAR 2008)

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2. In 1990, Mr. Naval bought a lot for PI,000,000.00 in a subdivision with the intention of building his residence on it. In 1994, 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 down; instead, he sold it for P800.000.00. At the time of the sale, the zonal value was P500.000.00. 1) Is the land a capital asset or an ordinary asset? Explain. 2) Is there any income tax due on the sale? Explain.  ANSWER: 1) The 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. (Sec. 33. NIRC). 2) Yes. Mr. Naval is liable to the 5% capital gains tax imposed under Section 21(e) of the Tax Code based on the gross selling price of P800.000.00 which is an amount higher than the zonal value. (BAR 1995) (ii) Types of gains from dealings in property

a) Ordinary income vis-à-vis capital gain 1. What is the difference between capital gains and ordinary gains? [3%1 What does the term “ordinary income’ include? [2%] SUGGESTED ANSWER: 1. Capital gains are gains realized from the sale or exchange of capital assets, while ordinary gains refer to gains realized from the sale or disposition of ordinary assets. 2. The term ordinary income includes any gain from the sale or exchange of property which is not a capital asset. These are the gains derived from the sale or exchange of property such as stock in trade of the taxpayer or other property of a kind 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 subject to the allowance for depreciation, or real property used in trade or business of the taxpayer. (Sec. 22[Z] in relation to Sec. 39(A)(1), both of the NIRC).  ALTERNATIVE ANSWER: The term ordinary income includes income from performance of services, whether professional or personal, gains accruing from business, and profit arising from the sale or exchange of ordinary assets. (BAR 1998) 2. X sold a piece of land to the United Church of Christ of Quezon City, Inc. The land is to be devoted strictly for religious purposes by the Church. When the Church tried to register the title of the land, the Register of Deeds refused claiming that the capital gains tax was not paid. Is the transaction exempt from the capital gains tax? Reasons.  ANSWER: No. Under Section 21 (e) in relation to Section 49 (a) (4) of the National Internal Revenue Code, the seller is the one liable for the payment of the capital gains tax from the sale of real property by an individual taxpayer. Meanwhile, the Church in this instant case is the buyer. Hence, Section 28 (4) of the 1987 Constitution, which exempts church lands, buildings, and improvements, does not apply because the obligation to pay the capital gains tax herein is imposed on X, the seller, and not on the Church. Since payment of the capital gains tax is a condition precedent for the registration of the transfer certificate of title to real property, the nonpayment herein by the seller is a valid reason for the Registry of Deeds to deny the transfer of title to the subject land.  ALTERNATIVE ANSWERS: a) Assuming that in the hands of X, the piece of land is a capital asset, then the sale to the Church is subject to Page | 59

capital gains tax for which X is liable. It is immaterial that the land will be used exclusively for religious purposes; if there is any exemption, then it applies to Church, and not to X, the vendor. b) No. The tax exemption granted to churches in the Constitution refers to property tax and not to capital

gains tax which is an income tax. Besides, the capital gains tax is the liability of the seller X and not the purchaser. (BAR 1993) 3.  An individual taxpayer, who owns a ten (10) door apartment with a monthly rental of PI0.000 each residential unit, sold this property to another individual taxpayer. Is the seller liable to pay the capital gains tax? (5%) SUGGESTED ANSWER: No. The 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 (10) door apartment. (BAR 1998) b) c) d) e)

Actual gain vis-à-vis presumed gain Long term capital gain vis-à-vis short-term capital gain Net capital gain, net capital loss Computation of the amount of gain or loss

1. Three brothers inherited in 1992 a parcel of land valued for real estate tax purposes at P3.0 million which they held in co-ownership. In 1995, they transferred the property to a newly organized corporation as their equity which was placed at the zonal value of P6.0 million. In exchange for the property, the three brothers thus each received shares of stock of the corporation with a total par value of P2.0 million or, altogether, a total of P6.0 million. No business was done by the Corporation, and the property remained idle. In the early part of 1997, one of the brothers, who was in dire need of funds, sold his shares to the two brothers for P2.0 million. Is the transaction subject to any internal revenue tax (other than the documentary stamp tax)?  ANSWER: Yes. The exchange in 1995 is a tax-free exchange so that the subsequent sale of one of the brothers of his shares to the other two (2) brothers in 1997 will be subject to income tax. This is so because the tax-free exchange merely deferred the recognition of income on the exchange transaction. The gain subject to income tax in the sale is measured by the difference between the selling price of the shares (P2 Million) and the basis of the real property in the hands of the transferor at the time of exchange which is the fair market value of his share in the real property at the time of inheritance (Section 34(b)(2), NIRC). The net gain from the sale of shares of stock is subject to the schedular capital gains tax of 10% for the first PI00,000 and 20% for the excess thereof (Section 21(d), NIRC).  ALTERNATIVE ANSWER: The exchange effected in 1995 did not qualify as a tax-free exchange because there is no showing that the three brothers gained control of the corporation by acquiring at least 51% of the voting rights. Since the entire gain on the exchange was previously subjected to income tax. Then, the sale will also be taxable if a gain results therefrom. In the instant case, the sale will not be subject to any internal revenue tax other than the documentary stamp tax, because the seller did not realize any gain from the safe. The gain is measured by the difference between the amount realized (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 P2 Million, an amount. Just equal to the amount realized from the sale. (BAR 1997) 2. In a qualified tax-free exchange of property for shares under Section 34 (c) (2) of the Tax Code, what is the tax basis for computing the capital gains on: (a) the sale of the assets received by the Corporation: and (b) the sale of the shares received by the stockholders in exchange of the assets? Page | 60

 ANSWER: In a qualified tax free exchange of property for shares under Section 34 (c) (2) of the Tax Code, the tax basis for computing the gain on the: a) Sale of the assets received by the corporation shall be the original/historical cost (Le. purchase price plus expenses of acquisition) of the property/assets given in exchange of the shares of stock. b) Sale of the shares of stock received by the stockholders In exchange of the assets shall be the original/historical cost of the property given in exchange of the shares of stock.  ALTERNATIVE ANSWER: The basis in computing capital gains tax in a qualified tax-free exchange under Sec. 34 (c) (2) 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 recognized to the transferor on the transfer. (b) With respect to the shares received by the stockholders in exchange of the assets - the same as the basis of the property, stock or securities exchanged, decreased by the money received and the fair market 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 recognized on the exchange.

In a qualified merger under Section 34 (c) (2) of the Tax Code, 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 corporation; and (b) the sale of the shares of stock received by the stockholders from the surviving corporation?  ANSWER: In a qualified merger under Section 34 (c) (2) of the Tax Code, 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

original/historical cost of the assets when still in the hands of the absorbed corporation. (b) The sale of the shares of stock received by the stockholders from the surviving corporation shall be the acquisition/historical cost of assets transferred to the surviving corporation. (BAR 1994) f) Income tax treatment of capital loss (a) Capital loss limitation rule (applicable to both corporations and individuals) 1. Mirador, Inc., a domestic corporation, filed its Annual Income Tax Return for its taxable year 2008 on  April 15, 2009. In the Return, it reflected an income tax overpayment of PI,000,000.00 and indicated its choice to carry-over the overpayment as an automatic tax credit against its income tax liabilities in subsequent years. On April 15,2010, it filed its Annual Income Tax Return for its taxable year 2009 reflecting a taxable loss and an income tax overpayment for the current year 2009 in the amount of P500,000.00 and its income tax overpayment for the prior year 2008 of PI ,000,000.00. In its 2009 Return, the corporation indicated its option to claim for refund the total income tax overpayment of PI,500,000.00 Choose which of the following statements is correct. a.

Mirador, Inc. may claim as refund the total income tax overpayment of PI,500,000.00 reflected in its income tax return for its taxable year 2009; Page | 61

b.

It may claim as refund the amount of P500,000.00 representing its income tax overpayment for its taxable year 2009; or c. No amount may be claimed as refund. Explain the basis of your answer. (5%)  ANSWER: It may claim as refund the amount of P500,000 representing its income tax overpayment for its taxable year 2009. (b) Net loss carry-over rule (applicable only to individuals)

g) Dealings in real property situated in the Philippines h) Dealings in shares of stock of Philippine corporations (c) Shares listed and traded in the stock exchange (d) Shares not listed and traded in the stock exchange i) Sale of principal residence 1. Last July 12, 2000, Mr. & Mrs. Peter Camacho sold their principal residence situated in Tandang Sora, Quezon City for Ten Million Pesos (PI0,000,000.00) with the intention of using the proceeds to acquire or construct a new principal residence in Aurora Hills, Baguio City. What conditions must be met in order that the capital gains presumed to have been realized from such sale may not be subject to capital gains tax? (5%) SUGGESTED ANSWER: The conditions are: 1. The proceeds are fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the sale or disposition of the principal residence or eighteen (18) months from July 12. 2000. 2. The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired. 3. The Commissioner of Internal Revenue must have been informed by Mr. & Mrs. Peter Camacho within thirty (30) days from the date of sale or disposition on July 12, 2000 through a prescribed return of their intention to avail of the tax exemption. 4. That the said exemption can only be availed of once every ten (10) years. 5. If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. (Sec. 24 (D) (2). NIRC of 1997) (BAR 2000) (iii) Passive investment income

a) Interest income 1. State with reasons the tax treatment of the following in the preparation of annual- income tax returns: Interest on deposits with (i) BPI Family Bank; and (ii) a local offshore banking unit of a foreign bank; SUGGESTED ANSWER: Interest on deposit with BPI Family Bank is a passive income subject to a final withholding tax rate of 20%; the interest on deposit with a local offshore banking unit of a foreign bank is a passive income subject to a final Page | 62

withholding tax rate of 7.5%. (Sec. 24(B)(1), NIRC). Both interest incomes are not to be declared as part of gross income in the income tax return. (BAR 2005) 2. Under Article XIV, Section 4 (3) of the 1987 Philippine Constitution, all revenues and assets of nonstock, non-profit educational institutions, used actually, directly and exclusively for educational purposes, are exempt from taxes and duties. Are income derived from interest on bank deposits and yields from deposit substitutes automatically exempt from taxation? Explain. (5%) SUGGESTED ANSWER: No. The interest income on bank deposits and yields from deposit substitutes are not automatically exempt from t axation. There must be a showing that the incomes are included in the school’s annual information return and duly audited financial statements together with: i.

Certifications from depository banks as to the amount of interest income earned from passive investments not subject to the 20% final withholding tax;

ii.

Certification of actual, direct and exclusive utilization of said income for educational purposes;

iii.

Board resolution on proposed project to be funded out of the money deposited in banks or placed in money market placements (Finance Department Order No. 149-95 issued November 24, 1995), which must be used actually, directly and exclusively for educational purposes. (BAR 2000)

3. During the year, a domestic corporation derived the following items of revenue: (a) gross receipts from a trading business: (b) interests from money placements in the banks; (c) dividends from its stock investments in domestic corporations; (d) gains from stock transactions through the Philippine Stock Exchange; (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?  ANSWER: The gross receipts from trading business is includible as an item of income in the corporate income tax return and subject to corporate income tax rate based on net income. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20%; dividends from domestic corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. The 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.  ALTERNATIVE ANSWER: The gross receipts from trading business are includible as an item of income in the corporate income tax return. Likewise, the gain or loss realized as a consequence of the receipt of proceeds under an insurance policy on the loss of goods will be included in the corporate income tax return either as a taxable gain or a deductible loss. The gain or loss is arrived at by deducting from the proceeds of insurance (amount realized) the basis of the good lost (Sec. 34(a). NIRC). The net income of the corporation shall be subject to corporate income tax rate of 35%. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20%; dividends from Domestic Corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. (BAR 1997) b) Dividend income Page | 63

1. State with reasons the tax treatment of the following in the preparation of annual- income tax returns: Dividends received by a domestic corporation from a foreign corporation; SUGGESTED ANSWER: Dividends received by a domestic corporation from a foreign corporation is subject to income tax and shall form part of the gross income. There is no law exempting this type of dividend from income tax. (Section 32 (7), NIRC). (BAR 2005) 2. On 03 January 1998, X, a Filipino citizen residing in the Philippines, purchased one hundred (100) shares in the capital stock of Y Corporation, a domestic company. On 03 January 2000, Y Corporation declared, out of the profits of the company earned after 01 January 1998, a hundred percent (100%) stock dividends on all stockholders of record as of 31 December 1999 as a result of which X holding in Y Corporation became two hundred (200) shares.  Are the stock dividends received by X subject to income tax? Explain. SUGGESTED ANSWER: No. Stock dividends are not realized income. Accordingly, the different provisions of the Tax Code imposing a tax on dividend income only includes within its purview cash and property dividends making stock dividends exempt from income tax. However, if the distribution of stock dividends is the equivalent of cash or property, as when the distribution results in a change of ownership interest of the shareholders, the stock dividends will be subject to income tax. (Section 24(B)(2); Section 25(A)&(B); Section 28(B)(5)(b), 1997 Tax Code) (BAR 2003) 3. What is disguised dividends in income taxation? Give an example. SUGGESTED ANSWER: Disguised 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 subjected to the corresponding tax of 35% on Philippine sourced gross income, or such other preferential rate as may be provided under a corresponding Tax Treaty. Example: Royalty payments under a corresponding licensing agreement. (BAR 1994) 4. Gains realized by the investor upon redemption of shares of stock in a mutual fund company are exempt from income tax. SUGGESTED ANSWER: TRUE [Sec 32(B)(7)(h),NIRC] c) Royalty income 1.  ABC, a domestic corporation, entered into a software license agreement with XYZ, a non-resident foreign corporation based in the U.S. Under the agreement which the parties forged in the U.S., XYZ granted ABC the right to use a computer system program and to avail of technical know-how relative to such program. In consideration for such rights, ABC agreed to pay 5% of the revenues it receives from customers who will use and apply the program in the Philippines. Discuss the tax implication of the transaction. (5%) SUGGESTED ANSWER: Page | 64

The amount payable under the agreement is in the nature of a royalty. The term royalty is broad enough to include compensation for the use of an intellectual property and supply of technical know-how as a means of enabling the application or enjoyment of any such property or right (Sec. 42(4), NIRC). The royalties paid to the non-resident U.S. corporation, equivalent to 5% of the revenues derived by ABC for the use of the program in the Philippines, is subject to a 30% final withholding tax, unless a lower tax rate is prescribed under an existing tax treaty. (Sec. 28(B)(1), NIRC). 2. The MKB-Phils. is a BOI-registered domestic corporation licensed by the MKB of the United Kingdom to distribute, support and use in the Philippines its computer software systems, including basic and related materials for banks. The MKB-Phils. provides consultancy and technical services incidental thereto by entering into licensing agreements with banks. Under such agreements, the MKB-Phils. will not acquire any proprietary rights in the licensed systems. The MKB-Phils. pays royalty to the MKB-UK, net of 15% withholding tax prescribed by the RP-UK Tax Treaty. Is the income of the MKB-Phils. under the licensing agreement with banks considered royalty subject to 20% final withholding tax? Why? If not, what kind of tax will its income be subject to? Explain. (5%) SUGGESTED ANSWER: Yes. The income of MKB-Phils. under the licensing agreement with banks shall be considered as royalty subject to the 20% final withholding tax. The term royalty is broad enough to include technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme. (Sec. 42(4)(f), NIRC). Accordingly, the consultancy and technical services rendered by MKB-Phils. which are incidental to the distribution, support and use of the computer systems of MKB-UK are taxable as royalty. (BAR 2002) d) Rental income (1) Lease of personal property (2) Lease of real property (3) Tax treatment of (a) Leasehold improvements by lessee (b) VAT added to rental/paid by the lessee (c) Advance rental/long term lease (iv) Annuities, proceeds from life insurance or other types of insurance 1. Born of a poor family on 14 February 1944. Mario worked his way through college. After working for more than 2 years in X Manufacturing Corporation, Mario decided to retire and avail of the benefits under the very reasonable retirement plan maintained by his employer. He planned to invest whatever retirement benefits he would receive in a business that will provide his employer with the needed raw materials. On the day of his retirement on 30 April 1985. he received P400.000.00 as retirement benefit. In addition, his endowment insurance policy, for which he was paying an annual premium of PI.520.00 since 1965. also matured. He was then paid the face value of his insurance policy in the amount of P50.000.00. Is his P50.000.00 insurance proceeds exempt from income taxation?  ANSWER: The P50.000.00 insurance proceeds is not totally exempt from income tax. The excluded amount is only that portion which corresponds to the premiums that he had paid since 1965. At the rate of PI,520.00 per year multiplied by twenty (20) years which was the period of the policy, he must have paid a total of P30.400.00. Accordingly, he will be subject to report as taxable income the amount of P 19,600.00 (Sec. 28. NIRC) (BAR 1991) (v) Prizes and awards

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1. Jose Miranda, a young artist and designer, received a prize of P100.000.00 for winning in the on-thespot peace poster contest sponsored by a local Lions Club. Shall the reward be included in the gross income of the recipient for tax purposes? Explain. (3%) SUGGESTED ANSWER: No. It is not includable in the gross income of the recipient because the same is subject to a final tax of 20%, the amount thereof being in excess of P10.000 (Sec. 24(B)(1), NIRC of 1997). The prize 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. [Sec. 32 (B) (7) (c), NIRC of 1997] Since it is an on-the-spot contest, it is evident that he must have joined the contest in order to earn the prize or award. (BAR 2000) 2. Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council, a sports association duly accredited by the Philippine Boxing Association. Onyoc received the amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to collect income tax on the amount received by Onyoc and donor’s tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.  ANSWER: The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the income tax. RA. No. 7549 explicitly provides that “All prizes and awards granted to athletes in local and International sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax". Neither is the BIR correct in collecting the donor’s tax from Ayala Land Corporation. The law is clear when it categorically stated “That the donor’s of said prizes and awards shall be exempt fro m the payment of the donor’s tax." (BAR 1996)

3. Evelyn is a graduate student of U.P. In January, 1991, she won the Palanca Award for an outstanding short story she wrote. The award was P25.000.00 in cash. In February, 1991, she was also named most Valuable Player of the Varsity volleyball team and she was given a trophy plus P10.000.00. Finally, in March, 1991, she received a Fellowship Award from the University of California to pursue a master's degree in American literature. The fellowship is for $10,000.00 plus freeboard and lodging for two (2) semesters. Should Evelyn include these awards and fellowship in her gross income? Reasons.  ANSWER: Gross income includes prizes and winnings (Section 27 of the National Internal Revenue Code [“NIRC"),  except those stated in Section 28 B, (8), (E) of the NIRC, to wit: “(E) Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civil achievement but only if: (i) (ii)

The recipient was selected without any action on his part to enter the contest or proceeding: and The recipient is not required to render substantial future services as a condition to receiving the prize or award.

The first award granted to Evelyn was a Palanca award. This kind of award requires submission of literary works. Hence, this is included in the gross income because it fails to meet the legal requisites provided for in the aforequoted provisions of law specifically item (i). The second award granted to Evelyn was the Most Valuable Player Award. In this kind of award, Evelyn did not file any application to enter into any contest. The award was given to her in recognition for her outstanding performance in the field of sports. However, the recognition in the field of sports is not among those stated in the aforequoted provision of law. Thus, the award granted to her does not fall under the aforequoted provision of law. Page | 66

The last award granted to her was the Fellowship Award. This requires also submission of application to qualify for such award. Hence, it fails to meet the necessary requisites of the aforequoted provision of law specifically item (i).  ALTERNATIVE ANSWERS: a) The award of P25.000.00 should be Included in Evelyn's gross Income for while it was earned as a prize for literaiy achievement, it cannot be said that she won without any action on her part to enter the contest. Her P100.000.00 prize as Most Valuable Player cannot be excluded for the same reason. Both awards, however, may be considered income subject to income tax. The fellowship award of $10,000.00 is, however, excluded from her income as she was selected therefor without any action on her part and the same was given to her in recognition of literaiy and educational achievement, presumably without her being required to render future services for the grantor. b) It depends. Section 28 (b) (8,E) of the NIRC enumerates the requirements in order to exclude the item from

taxation. The Tax Code requires that the prizes and awards are given primarily in recognition of religious, charitable, scientific, educational, artistic, literary or civil achievements. The awards mentioned were given to the taxpayer in recognition of her literary achievement in the case of the Palanca Award, the most valuable player award for civic/educational achievement and the fellowship award'for educational achievement. Section 28(b) further requires that the recipient must be selected without any action on his part to enter the contest or proceeding and the taxpayer-recipient is not required to render substantial future services as a condition to receiving the prize or award. If these two requirements are met, then the items should not be included in the gross income. (BAR 1993) (vi) Pensions, retirement benefit, or separation pay

1. Company A decides to close its operations due to continuing losses and to terminate the services of its employees. Under the Labor Code, employees who are separated from service for such cause are entitled to a minimum of one-half month pay for every year of service. Company A paid the equivalent of one month pay for every year of service and the cash equivalent of unused vacation and sick leaves as separation benefits.  Are such benefits taxable and subject to withholding tax under the Tax Code? Decide with reasons. (5%) SUGGESTED ANSWER: The separation benefits paid by Company A to its employees are excluded from gross income being in the nature of benefits given to employees whose services were terminated due to causes beyond their control. (Sec. 32(B)(6)(b), NIRC). The entire benefits, thus, are not taxable and not subject to withholding tax under the Tax Code. (BAR 2005) 2. To start a business of his own, Mr. Mario de Guzman opted for an early retirement from a private company after ten (10) years of service. Pursuant to the company's qualified arid approved private retirement benefit plan, he was paid his retirement benefit which was subjected to withholding tax. Is the employer correct in withholding the tax? Explain. (2%) SUGGESTED ANSWER: It depends. An employee retiring under a company's qualified and private retirement plan can only be exempt from income tax on his retirement benefits if the following requisites are met: (1) that the retiring employee Page | 67

must have been In service of the same employer for at least ten (10) years; (2) that he is not less than 50 years of age at the time of retirement; and (3) the benefit is availed of only once. In the instant case, there is no mention whether the employee has likewise complied with requisites number (2) and (3). Under what conditions are retirement benefits received by officials and employees of private firms excluded from gross income and exempt from taxation? (3%) SUGGESTED ANSWER: The conditions to be met in order that retirement benefits received by officials and employees of private firms are excluded from gross income and exempt from taxation are as follows: 1.

Under Republic Act No. 4917 (those received under a reasonable private benefit plan): I. II. III.

2.

the retiring official or employee must have been in service of the same employer for at least ten (10) years; that he is not less than fifty (50) years of age at the time of retirement; and that the benefit is availed of only once.

Under Republic Act No. 7641 (those received from employers without any retirement plan): I. II.

Those received under existing collective bargaining agreement and other agreements are exempt; and In the absence of retirement plan or agreement providing for retirement benefits the benefits are excluded from gross income and exempt from income tax if: A. retiring employee must have served at least flve (5) years; and B. that he is not less than sixty (60) years of age but not more than sixty five (65). (BAR 2000)

3. Mr. Javier is a non-resident senior citizen. He receives a monthly pension from the GSIS. which he deposits with the PNB-Makati Branch. Is he exempt from income tax and therefore not required to file an income tax return? (5%) SUGGESTED ANSWER: Mr. Javier is exempt from income tax on his monthly GSIS pension (Sec. 32(B)(6)(f). NIRC of 1997) but not on the interest income that might accrue on the pensions deposited with PNB which are subject to final withholding tax. Consequently, since Mr. Javier’s sole t axable income would have been subjected to a final withholding tax, he is not required anymore to file an income tax return. [Sec. 51 (A) (2) (c). Ibid]. (BAR 2000)

4.  A Co., a Philippine corporation, has two divisions —  manufacturing and construction. Due to the economic situation, it had to close its construction division and lay-off the employees in that division. A Co. has a retirement plan approved by the BIR, which requires a minimum of 50 years of age and 10 years of service in the same employer at the time of retirement. There are 2 groups of employees to be laid off: (a) Employees who are at least 50 years of age and has at 10 years of service at the time of termination of employment. (b) Employees who do no meet either the age or length of service A Co. plans to give the following: For category (A) employees - the benefits under the BIR approved plan plus an ex gratia payment of one month of every year of service. Page | 68

For category (B) employees - one month for every year of service. For both categories, the cash equivalent of unused vacation and sick leave credits.  A Co. seeks your advice as to whether or not it will subject any of these payments to WT. Explain your advice. (5%) SUGGESTED ANSWER: For category A employees, all the benefits received on account of their separation are not subject to income tax, hence no withholding tax shall be imposed. The benefits received under the BIR-approved plan upon meeting the service requirement and age requirement are explicitly excluded from gross income. The ex gratia payment also qualifies as an exclusion from gross income being in the nature of benefit received on account of separation due to causes beyond the employees' control. (Section 32(B), NIRC). The cash equivalent of unused vacation and sick leave credits qualifies as part of separation benefits excluded from gross income (CIR v. Court of Appeals, GR No. 96016, October 17, 1991). For category B employees, all the benefits received by them will also be exempt from income tax, hence not subject to withholding tax. These are benefits received on account of separation due to causes beyond the employees' control, which are specifically excluded from gross income. (Section 32(B), NIRC).  ALTERNATIVE ANSWER: All of the payments are not subject to income tax and should not also be subject to WT. The employees were laid off, hence separated for a cause beyond their control. Consequently, 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 and/or is below fifty years of age. (Section 32(B), NIRC). (BAR 1999) 5. X, an employee of A BC Corporation died. ABC Corporation gave X’s widow an amount equivalent to Xs salary for one year. Is the amount considered taxable income to the widow? Why?  ANSWER: No. The amount received by the widow from the decedent’s employer may either be a gift or a separation benefit on account of death. Both are exclusions from gross income pursuant to provisions of Section 28(b) of the Tax Code.  ALTERNATIVE ANSWER: No. Since 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 U.S. tax case (Estate of Hellstrom vs. Commissioner, 24 T.C. 916), 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. The controlling facts which would lead to the conclusion that the amount received by the widow is not an income are as follows: a. b. c. d. e.

the gift was made to the widow rather than the estate: there was no obligation for the corporation to make further payments to the deceased; the widow had never worked for the corporation; the corporation received no economic benefit; and the deceased had been fully compensated for his services (Estate of Sydney Carter us. Commissioner, 453 F. 2d 61 (2d Cir. 1971). (BAR 1996)

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6.  A, an employee of the Court of Appeals, retired upon reaching the compulsory age of 65 years. Upon compulsory retirement, A received the money value of his accumulated leave credits in the amount of P500,000.00. Is said amount subject to tax? Explain.  ANSWER: No. The commutation of leave credits, more commonly known as terminal leave pay, Le., the cash equivalent of accumulated vacation and sick leave credits given to an officer or employee who retires, or separated from the service through no fault of his own, is exempt from income tax. (BIR Ruling 238-91 dated November 8, 1991; Commissioner vs. CAandEfrenCastaneda, GRNo. 96016, October 17, 1991). (BAR 1996) 7. Mr. Jacobo worked for a manufacturing firm. Due to business reverses the firm offered 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 and received P400.000.00 as separation pay under the program.  After all the employees 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 the service. He also received P400.000.00 as separation pay. Did Mr. Jacobo derive income when he received his separation pay? Explain.  ANSWER: Yes, Mr. Jacobo derived a taxable income when he received his separation pay because his separation from employment was voluntary on his part in view of his offer to resign. What is excluded from gross income is any amount received by an official or employee as a consequence of separation of such official or employee from the service of the employer for any cause beyond the control of the s aid official or employee (Sec 28, NIRC).  ALTERNATIVE ANSWER: No, Mr. Jacobo 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 employee’s control. The voluntary redundanc y program requiring employees to make an offer to resign is only considered as a tool to expedite the lay-off of excess manpower whose services are no longer needed by the employer, but is not the main reason or cause for the termination. Did Mr. Kintanar derive income when he received his separation pay? Explain.  ANSWER: No. Mr. Kintanar did not derive any income when he received his separation pay because his separation from employment is due to causes beyond his control. The separation was involuntary as it was a c onsequence of the closure of various unprofitable departments pursuant to the redundancy program. (BAR 1995) 8. Mr. Quiroz worked as chief accountant of a hospital for forty-five years. When he retired at 65 he received retirement pay equivalent to two months’ salary for every year of service as provided in the hospital BIR approved retirement plan. The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was provided for in the hospital's retirement plan in view of his loyalty and invaluable services for fortyfive years; hence, it resolved to pay him a gratuity of P1 Million over and above his retirement pay. The Commissioner of Internal Revenue taxed the P1 Million as part of the gross compensation income of Quiroz who protested that it was excluded from income because (a) it was a retirement pay Page | 70

Is Mr. Quiroz correct in claiming that the additional PI Million was retirement pay and therefore excluded from income? Explain. Is Mr. Quiroz correct in claiming that the additional PI Million was gift and therefore excluded from income? Explain.  ANSWER: No. The additional P1 million is not a retirement pay but a part of the gross compensation income of Mr. Quiroz. This is not a retirement benefit received in accordance with a reasonable private benefit plan maintained by the employer as it was not paid out of the retirement plan. Accordingly, the amount received in excess of the retirement benefits that he is entitled to receive under the BIR-approved retirement plan would not qualify as an exclusion from gross income. No. The 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. Under the employer ’s ‘motivation test,’ emphasis should be placed on the value of Mr. Quiroz services to the company as the compelling reason for giving him the gratuity, hence it should constitute a taxable income. The payment would only qualify as a gift if there is nothi ng but ‘good will, esteem and kindness' which motivated the employer to give the gratuity. (Stanton vs. U.S., 186 F. Supp. 393). Such is not the case in the herein problem.  ALTERNATIVE ANSWER: Yes. The 1 million is not compensation income subject to income tax but a gift from his employer. There was no evidence presented to show that he was not fully compensated for his 45 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. The PI million is purely a gratuity from the company. It is a taxable gift to the transferor. Under the Tax Code, gifts are excluded from gross income therefore exempt from income tax. (Sec. 28(b)(3). NIRC; Pirovano vs. Commissioner) (BAR 1995) 9. Pedro Reyes, an official of Corporation X, asked for an “earlier retirement” because he was emigrating to Australia. He was paid P2,000.000.00 as separation pay in recognition of his valuable service to the corporation. Juan Cruz, another official of the same company, was separated for occupying a redundant position. He was given PI.000,000.00 as separation pay. Jose Bautista was separated due to his failing eyesight. He was given P500,000.00 as separation pay.  All the three (3) were not qualified to retire under the BIR-approved pension plan of the corporation. (a) Is the separation pay given to Reyes subject to income tax? (b) How about the separation pay received by Cruz? (c) How about the separation pay received by Bautista?  ANSWER: (a) The separation pay given to Reyes is subject to income tax as compensation income because it arises from a service rendered pursuant to an employer-employee relationship. It is not considered an exclusion from gross income because the rule in taxation is tax construed in strictissimijuris or the rule on strict interpretation of tax exemptions. (b) The separation pay received by Cruz is not subject to income tax because his separation from the company was involuntary (Sec. 28 b (7), Tax Code).

(c) The separation pay received by Bautista is likewise not subject to tax. His separation is due to disability, hence involuntary. Page | 71

Under the law, separation pay received through involuntary causes are exempt from taxation. (BAR 1994) 10. Maribel Santos, a retired public school teacher, relies on her pension from the GSIS and the interest income from a time deposit of P500.000.00 with ABC Bank. Is Miss Santos liable to pay any tax on her income?  ANSWER: Maribel Santos is exempt from tax on the pension from the GSIS (Sec. 28(b((7)(F), Tax Code). However, as regards her time deposit, the interest she receives thereon is subject to 20% final withholding tax. (Sec. 21(a)(c). Tax Code). (BAR 1994) 11. Born of a poor family on 14 February 1944. Mario worked his way through college. After working for more than 2 years in X Manufacturing Corporation, Mario decided to retire and avail of the benefits under the very reasonable retirement plan maintained by his employer. He planned to invest whatever retirement benefits he would receive in a business that will provide his employer with the needed raw materials. On the day of his retirement on 30 April 1985. he received P400.000.00 as retirement benefit. In addition, his endowment insurance policy, for which he was paying an annual premium of PI.520.00 since 1965. also matured. He was then paid the face value of his insurance policy in the amount of P50.000.00. Is Mario’s P400.000.00 retirement benefit subject to income tax?

 ANSWER: Mario’s P400.000.00 retirement benefit is subject to income tax. To be exempt, the retirement pay must have been extended to an employee who is at least 50 years of age and who would have worked for at least ten (10) years with the employer. The amount cannot be considered as a separation pay that would have exempted benefits from income tax since it was Mario who had decided to retire instead of being required to do so (Sec. 28. NIRC) (BAR 1991) 12. Delstar Emmanuel Perez, a government employee, retires from the service upon reaching the compulsory retirement age of 65. Would the amount he is entitled to receive by way of commutation of his accumulated leave credits, of his terminal leave pay, be subject to income tax?  ANSWER: The amount that Emmanuel Perez is to receive should not be subjected to income tax, and such was the ruling by the Supreme Court in the In Re Zialcita Administrative Case (Adm. Matter No. 90-6015-SC, 18 Oct. 1990). The ruling apparently repudiated, or at least is inconsistent with, its earlier decision in Commissioner vs. Victoriano (G.R. No. 83176, 10 August 1989). (BAR 1991) (vii) Income from any source whatever

a) Forgiveness of indebtedness b) Recovery of accounts previously written-off – when taxable/when not taxable 1. Explain briefly whether the following items are taxable or non- taxable: Recovery of bad debts previously charged off; SUGGESTED ANSWER: Recovery of bad debts previously charged off is taxable to the extent of income tax benefit of said deduction. (Sec. 34(E)(1), NIRC). (BAR 2005) c) Receipt of tax refunds or credit 1. Explain briefly whether the following items are taxable or non- taxable: Page | 72

Taxes paid and subsequently refunded; SUGGESTED ANSWER: It depends. Taxes paid which are allowed as a deduction from gross income are taxable when subsequently refunded but only to the extent of the income tax benefit of said deduction. (Sec. 34(C)(1), NIRC). It fol lows that taxes paid which are not allowed as deduction from gross income, i.e., income tax, donor's tax and estate tax, are not taxable when refunded. (BAR 2005) d) Income from any source whatever 1. Explain briefly whether the following items are taxable or non- taxable: a) Income from jueteng; SUGGESTED ANSWER: It is taxable. The law imposes a tax on income from any source whatever* which means that it includes income whether legal or illegal. (Sec. 32(A), NIRC). (BAR 2005) 2. What is meant by the “tax benefit rule”? SUGGESTED ANSWER: Tax benefit rule states that the taxpayer is obliged to declare as taxable income subsequent recovery of bad debts in the year they were collected to the extent of the tax benefit enjoyed 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 subsequently refunded or credited. The taxpayer is also required to report as taxable income the subsequent tax refund or tax credit granted to the extent of the tax benefit the taxpayer enjoyed when such taxes were previously claimed as deduction from income. (BAR 2003) 3. Give an illustration of the application of the tax benefit rule. SUGGESTED ANSWER: X Company has a business connected receivable amounting to P100,000.00 from Y who was declared bankrupt by a competent court. Despite earnest efforts to collect the same, Y was not able to pay, prompting X Company to write-off the entire liability. During the year of write-off, the entire amount was claimed as a deduction for income tax purposes reducing the taxable net income of X Company to only PI, 000,000.00. Three years later, Y voluntarily paid his obligation previously written-off to X Company. In the year of recovery, the entire amount constitutes part of gross income of X Company because it was able to get full tax benefit three years earlier. (BAR 2003) 4. Mr. Lajojo is a big-time swindler. In one year he was able to earn PI Million from his swindling activities. When the Commissioner of Internal Revenue discovered his income from swindling, the Commissioner assessed him a deficiency income tax for such income. The lawyer of Mr. Lajojo protested the assessment on the following grounds: The income tax applies only to legal income, not to illegal income: Mr. Lajojo’ s 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 peso; and

How will you rule on each of the three grounds for the protest? Explain. Page | 73

 ANSWER: The contention that the income tax applies to legal income and not to illegal income is not correct. Section 28(a) of the Tax Code includes within the purview of gross income all income from whatever source derived. Hence, the illegality of the income will not preclude the imposition of the income tax thereon. The contention that the receipts from his swindling did not constitute income because of his obligation to return the amount swindled is likewise not correct. When a taxpayer acquires 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 adjudged to restore its equivalent (James us. U.S.,366 U.S. 213, 1961). To treat the embezzled funds not as taxable Income would perpetuate injustice by relieving embezzlers of the duty of paying income taxes on the money they enrich themselves with through embezzlement, while honest people pay their taxes on every conceivable type of income. (Janies us. U.S.) (BAR 1995) e) Source rules in determining income from within and without (1) Interests (2) Dividends (3) Services 1. Kenya International Airlines (KIA) is a foreign corporation, organized under the laws of Kenya. It is not licensed to do business in the Philippines. 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, Philippine Airlines (PAL), a Philippine corporation. KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside the Philippines. The total sales of airline tickets transacted by PAL for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA deficiency income taxes at the rate of 35% on its taxable income, finding that KIA’s airline ticket sales constit uted income derived from sources within the Philippines. KIA filed a protest on the ground that the P2,968,156.00 should be considered as income derived exclusively from sources outside the Philippines since KIA only serviced passengers outside Philippine territory. Is the position of KIA tenable? Reasons. (4%) SUGGESTED ANSWER: KIA’s position is not tenable. The revenue it derived in 1997 from sales of airplane tickets in the Philippines, through its agent PAL, is considered as income from within the Philippines, subject to the 35% tax based on its taxable income pursuant to Section 25(a)( 1) of the Tax Code of 1977. The transacting of business in the Philippines through its local sales agent, makes KIA a resident foreign corporation despite the absence of landing rights, thus, it is taxable on income derived from within. The source of an income is the property, activity or service that produced the income. In the instant case, it is the sale of tickets in the Philippines which is the activity that produc ed the income. KIA’s income being derived from within, is subject to Philippine income tax (CIR v. British Overseas Airways Corporation, 149 SCRA 395, [1987]). Note: The taxable year involved in the problem is 1997, hence, the suggested answer above follows the applicable provision of the old Tax Code (National Internal Revenue Code of1977) then in effect and the prevailing jurisprudence on the matter. However, with the adoption of the National Internal Revenue Code ofl997(RA 8424) which took effect on January 1, 1998, it is expected that the bar candidates have lost track of the change in the tax law which transpired more than a decade ago. For this reason, it is respectfully requested Page | 74

that an answer based on the provisions of the New Tax Code shall be given full credit. Accordingly, an answer framed in this wise should also be considered as a correct answer, viz:  ANOTHER SUGGESTED ANSWER: Yes. KIA is a non-resident foreign corporation which is taxable only on income from within. The income of KIA as an international air carrier is derived from the sale of transportation services. Compensation for services is an income from within if the services are performed in the Philippines (Section 42(A)(3), NIRC). The origination of the flight is determinative of the source of the income of the international air carrier. If the flight originates in the Philippines to a foreign destination, the income is an income from within; if it originates in a foreign country to any destination, the income is from without. In the case at bar, no flight will originate from the Philippines because KIA is not licensed to do business here. Hence, the income is not taxable in the Philippines (Section 28(A)(3)(a), NIRC). (BAR 2009) (4) Rentals (5) Royalties (6) Sale of real property (7) Sale of personal property (8) Shares of stock of domestic corporation f. Exclusions from gross income 1. Distinguish “Exclusion from Gross Income" from “Deductions From Gross Income”. Give an example of each. (2%) SUGGESTED ANSWER: Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross income, for purposes of computing the taxpayer is taxable income, due to the following reasons: (1) It is exempted by the fundamental law; (2) It is exempted by statute; and (3) It does not come within the definition of income. (Section 61, RR No. 2). Deductions from gross income, on the other hand, are the amounts, which the law allows to be deducted from gross income in order to arrive at net income. Exclusions pertain to the computation of gross income, while deductions pertain to the computation of net income. Exclusions 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. Example of an exclusion from gross income is proceeds of life insurance received by the beneficiary upon the death of the insured which is not an income or 13th month pay of an employee not exceeding P30.000 which is an income not recognized for tax purposes. Example of a deduction is business rental. (BAR 2001) (1) Rationale for the exclusions (2) Taxpayers who may avail of the exclusions (3) Exclusions distinguished from deductions and tax credit 1. Congress enacts a law granting grade school and high school students a 10% discount on all schoolprescribed textbooks purchased from any bookstore. The law allows bookstores to claim in full the discount as a tax credit. 2. Can the BIR require the bookstores to deduct the amount of the discount from their gross income? Explain. 2.5% Page | 75

SUGGESTED ANSWER: 2. No. Tax credit which reduces the tax liability is different from a tax deduction which merely reduces the income to arrive at the tax base. Since the law allowed bookstores to claim in full the discount as a tax credit, the BIR is not allowed to expand or contract the legislative mandate (CIR v. Central Luzon Drug Corp., Id.). (BAR 2006) (4) Under the Constitution (i) Income derived by the government or its political subdivisions from the exercise of any essential governmental function (ii) Under the Tax Code a) Proceeds of life insurance policies 1. Noel Santos is a very bright computer science graduate. He was hired by Hewlett Packard. To entice him to accept the offer of employment, he was offered the arrangement that part of his compensation would be an insurance policy with a face value of P20 Million. The parents of Noel are made the beneficiaries of the insurance policy. a) Will the proceeds of the insurance form part of the income of the parents of Noel and be subject to income tax? Reason briefly. SUGGESTED ANSWER: No. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured are not included as part of the gross income of the recipient. (Section 32(B)(1), NIRC). There is no income realized because nothing flows to Noel’s parents other than a mere return of capital, the capital being  the life of the insured. (BAR 2007) 2. State with reasons the tax treatment of the following in the preparation of annual- income tax returns: Proceeds of life insurance received by a child as irrevocable beneficiary; SUGGESTED ANSWER: The proceeds of life insurance received by a child as irrevocable beneficiary are not to be reported in the annual income tax returns, because they are excluded from gross income. This kind of receipt does not fall within the definition of income - Many wealth which flows into the taxpayer other than a mere return of capital”. Since insurance is compensatory in nature, the receipt is merely considered as a return of capital. (Section 32(B)(1), NIRC; Fisher v. Trinidad, 43 Phil. 73 (19221). (BAR 2005) 3. On 30 June 2000, X took out a life insurance policy on his own life in the amount of P2,000,000.00. He designated his wife, Y, as irrevocable beneficiary to P1,000,000.00 and his son, Z, to the balance of P1,000,000.00 but, in the latter designation, reserving his right to substitute him for another. On 01 September 2003, X died and his wife and son went to the insurer to collect the proceeds of X’s life insurance policy.  Are the proceeds of the insurance subject to income tax on the part of Y and Z for their respective shares? Explain. SUGGESTED ANSWER: No. The 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. The 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. (Section 32(B)(1) 1997 Tax Code) (BAR 2003) Page | 76

4. Born of a poor family on 14 February 1944. Mario worked his way through college. After working for more than 2 years in X Manufacturing Corporation, Mario decided to retire and avail of the benefits under the very reasonable retirement plan maintained by his employer. He planned to invest whatever retirement benefits he would receive in a business that will provide his employer with the needed raw materials. On the day of his retirement on 30 April 1985. he received P400.000.00 as retirement benefit. In addition, his endowment insurance policy, for which he was paying an annual premium of PI.520.00 since 1965. also matured. He was then paid the face value of his insurance policy in the amount of P50.000.00. Is his P50.000.00 insurance proceeds exempt from income taxation?  ANSWER: The P50.000.00 insurance proceeds is not totally exempt from income tax. The excluded amount is only that portion which corresponds to the premiums that he had paid since 1965. At the rate of PI,520.00 per year multiplied by twenty (20) years which was the period of the policy, he must have paid a total of P30.400.00. Accordingly, he will be subject to report as taxable income the amount of P 19,600.00 (Sec. 28. NIRC) (BAR 1991) b) Return of premium paid c) Amounts received under life insurance, endowment or annuity contracts d) Value of property acquired by gift, bequest, devise or descent 1. Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a residential house and lot in Quezon City. After the recent wedding of their son, Mario, to Maria, the spouses donated said real property to them. At the time of donation, the real property has a fair market value of P2 million.  Are Mario and Maria subject to income tax for the value of the property donated to them? Explain. (4%) SUGGESTED ANSWER: No. The value of a property acquired by gift is an exclusion from gross income. (Section 32(B)(3), NIRC). (BAR 2008) 2. Mr. Osorio, a bank executive, while playing golf with Mr. Perez, a manufacturing firm executive, mentioned to the latter that his (Osorio) bank had just opened a business relationship with a big foreign importer of goods which Perez' company manufactures. Perez requested Osorio to introduce him to this foreign importer and put in a good word for him (Perez), which Osorio did. As a result, Perez was able to make a profitable business deal with the foreign importer. In gratitude Perez, in behalf of his manufacturing firm, sent Osorio an expensive car as a gift. Osorio called Perez and told him that there was really no obligation on the part of Perez or his company, to give such an expensive gift. But Perez insisted that Osorio keep the car. The company of Perez deducted the cost of the car as a business expense. The Commissioner of Internal Revenue included the fair market 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 Commissioner or Osorio? Explain.  ANSWER: The Commissioner is correct. The car having been given to Mr. Osorio in consideration of having introduced Mr. Perez to a foreign Importer which resulted to a profitable business deal is considered to be Page | 77

a compensation for services rendered. The transfer is not a gift because it is not made out of a detached or disinterested generosity but for a benefit accruing to Mr. Perez. The fact that the company of Mr. Perez takes a business deduction for the payment indicates that it was considered as a pay rather than a gift. Hence, the fair market value of the car is includable in the gross Income pursuant to Section 28(a)(1) of the Tax Code (See 1974 Federal Tax Handbook, p. 145). A 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 payor is anticipated, is a taxable income to the payee even if characterized as a ‘gift’ by the payor (Commissioner vs. Duberstein, 363 U.S. 278).  ALTERNATIVE ANSWER: Mr. Osorio is correct. The car was not payment for services rendered. There was no prior agreement or negotiations between Mr. Osorio and Mr. Perez that the former will be compensated for his services. Mr. Perez, in behalf of his company, gave the car to Mr. Osorio out of gratitude. The transfer having been made gratuitously should be treated as a gift subject to donor’s tax and should be excluded from the gross income of the recipient, Mr. Osorio. The Commissioner should cancel the assessment of deficiency income tax to Mr. Osorio and inste ad assess deficiency donor’s tax on Mr Perez’ company. (Sec. 28(b)(3), NIRC; Pirovano vs. Commissioner. (BAR 1995) 3. Mr. Quiroz worked as chief accountant of a hospital for forty-five years. When he retired at 65 he received retirement pay equivalent to two months’ salary for every year of service as provided in the hospital BIR approved retirement plan. The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was provided for in the hospital's retirement plan in view of his loyalty and invaluable services for forty-five years; hence, it resolved to pay him a gratuity of P1 Million over and above his retirement pay. The Commissioner of Internal Revenue taxed the P1 Million as part of the gross compensation income of Quiroz who protested that it was excluded from income because (b) it was a gift. Is Mr. Quiroz correct in claiming that the additional PI Million was gift and therefore excluded from income? Explain.  ANSWER: No. The 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. Under the employer’s ‘motivation test,’ emphasis should be placed on the value of Mr. Quiroz services to the company as the comp elling reason for giving him the gratuity, hence it should constitute a taxable income. The payment would only qualify as a gift if there is nothing but ‘good will, esteem and kindness' which motivated the employer to give the gratuity. (Stanton vs. U.S., 186 F. Supp. 393). Such is not the case in the herein problem.  ALTERNATIVE ANSWER: Yes. The 1 million is not compensation income subject to income tax but a gift from his employer. There was no evidence presented to show that he was not fully compensated for his 45 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. The PI million is purely a gratuity from the company. It is a taxable gift to the transferor. Under the Tax Code, gifts are excluded from gross income therefore exempt from income tax. (Sec. 28(b)(3). NIRC; Pirovano vs. Commissioner) (BAR 1995) 4. Mr. Rodrigo, an 80-year old retired businessman, fell in love with 20-year old Tetchie Sonora, a night club hospitality girl. Although she refused to marry him she agreed to be his “live -in" partner.

Page | 78

In gratitude Mr. Rodrigo transferred to her a condominium unit, where they both live, under a deed of sale for P10 Million. Mr. Rodrigo paid the capital gains tax of 5% of P10 Million. The Commissioner of Internal Revenue found that the property was transferred to Tetchie Sonora by Mr. Rodrigo because of the companionship she was providing him. Accordingly. the Commissioner made a determination that Sonora had compensation income of P10 Million in the year the condominium unit was transferred to her and issued a deficiency income tax assessment. Tetchie Sonora protests the assessment and claims that the transfer of the condominium unit was a gift and therefore excluded from income. How will you rule on the protest of Tetchie Sonora? Explain.  ANSWER: I will grant the protest and cancel the assessment. The transfer of the property by Mr. Rodrigo to Ms. Sonora was gratuitous. The deed of sale indicating a P10 million consideration was simulated because Mr. Rodrigo did not-receive anything from the sale. The problem categorically states that the transfer was made in gratitude to Ms. Sonora’s companionship. The transfer being gratuitous is subject to donor’s tax. Mr. Rodrigo should be assessed deficiency donor’s tax and a 50% surcharge imposed for fraudulently simulating a contract of sale to evade donor’s tax, (Sec. 91(b), NIRC). (BAR 1995) 5.  ABC Computer Corp. purchased some years ago Membership,Certificate No. 7 from the Calabar Golf Club, Inc. for P300.000.00. In 4 September 1985, it transferred the same to Mr. John Johnson, its  American computer consultant, to enable him to avail of the facilities of the Club during his stay here. The consultancy agreement expired two (2) years later. In the meantime, the value of the Club share appreciated and what was purchased by the corporation at P300,000.00, commanded a market value of P800.000.00 in 1987. Before he returned home a few days after his tenure ended, Mr. Johnson transferred the subject share to Mr. Robert James, the new consultant of the firm and the newly designated playing representative, under a Deed of Declaration of Trust and Assignment of Shares wherein the former acknowledged the absolute ownership of ABC Computer Corp. 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. Is the said assignment a gift and, therefore, subject to gift tax?  ANSWER: The assignment can neither be held to be a gift. To be considered a gift within the context of the NIRC, there must be a transfer of ownership or a quantifiable interest. More importantly, the transfer of the membership certificate was merely a designation of the consultant to be the “playing representative" of ABC Computer Corporation in the Calabar Golf Club. (BAR 1991) e) Amount received through accident or health insurance 1.  Antonia Santos, 30 years old, gainfully employed, is the sister of Eduardo Santos. She died in an airplane crash. Edgardo is a lawyer and he negotiated with the Airline Company and insurance company and they were able to agree to a total settlement of P10 Million. This is what Antonia would have earned as somebody who was gainfully employed. Edgardo was her only heir.

Should Edgardo report the P10 Million as his income being Antonia’s only heir? Reason briefly.

SUGGESTED ANSWER: Page | 79

The PIOM should not be reported by Edgardo as his income. The amount received in a settlement agreement with the airline company and insurance company is an amount received from the accident insurance covering the passengers of the airline company and is in the nature of compensation for personal injuries and for damages sustained on account of such injuries, which is excluded from the gross income of the recipient. (Section 32(B)(4), NIRC).  ALTERNATIVE ANSWER: No. The P10M having been received for the loss of life, is compensatory in nature, hence, is not considered as an income but a mere return of capital. Income is any wealth which flows to the taxpayer other than a mere return of capital. (Madrigal v. Rafferty, 38 Phil. 414 [1918]). (BAR 2007) 2. JR was a passenger of an airline that crashed. He survived the accident but sustained serious physical injuries which required hospitalization for 3 months. Following negotiations with the airline and its insurer, an agreement was reached under the terms of which JR was paid the following amounts: P500, 000.00 for his hospitalization: P250, 000.00 as moral damages: P300, 000.00 for loss of income during the period of his treatment and recuperation. In addition, JR received from his employer the amount of P200,000.00 representing the cash equivalent of his earned vacation and sick leaves. Which, if any, of the amounts he received are subject to income tax? Explain. (5%) SUGGESTED ANSWER: The amount of P200,000.00 that JR received from his employer is subject to income tax except the money equivalent of ten (10) days unutilized vacation leave credits which is not taxable. Amounts of vacation allowances or sick leave credits which are paid to an employee constitutes compensation (Sec. 2.78(A)(7), RR No. 2-98, as amended by RR No. 10-2000). The amounts that JR received from the airline are excluded from gross income and not subject to income tax because they are compensation for personal injuries suffered from an accident as well as damages received as a result of an agreement (negotiation) on account of such injuries. (Sec. 32(B)(4), NIRC). (BAR 2005) 3. X, while driving home from his office, was seriously injured when his automobile was bumped from behind by a bus driven by a reckless driver. As a result, he had to pay P200, 000.00 to his doctor and P100, 000.00 to the hospital where he was confined for treatment. He filed a suit against the bus driver and the bus company and was awarded and paid actual damages of P300,000.00 (for his doctor and hospitalization bills), P100, 000.00 by way of moral damages, and P50, 000.00 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 X and which are not? Explain. SUGGESTED ANSWER: Nothing is taxable. Under the Tax Code, any amount received as compensation for personal injuries or sickness, plus the amounts for any damages received whether by suit or agreement, on account of such injuries or sickness shall be excluded from gross income. Since the entire amount of P450, 000.00 received are award of damages on account of the injuries sustained, all shall be excluded from his gross income. Obviously, these damages are considered by law as mere return of capital. (Section 32(B)(4), 1997 Tax Code) (BAR 2003) 4. Mr. Infante was hit by a wayward bus while on his way to work. He survived but had to pay P400.000.00 for his hospitalization. He was unable to work for six months which meant that he did not receive his usual salary of P10,000.00 a month or a total of P60.000.00. He sued the bus company and was able to obtain a final judgment awarding him P400.000.00 as reimbursement for his hospitalization, P60.000 for the salaries he failed to receive while hospitalized, P200.000.00 as Page | 80

moral damages for his pain and suffering, and P100,000.00 as exemplary damages. He was able to collect in full from the judgment. How much income did he realize when he collected on the judgment? Explain. None. The P200.000 moral and exemplary damages are compensation for injuries sustained by Mr. Infante. The P400.000.00 reimbursement for hospitalization expenses and the P60.000.00 for salaries he failed to receive are ‘amounts of any damages received whether by suit or agreement on account of such injuries.’ Section 28(b)(5) of the Tax Code specifically exclude these amounts from the gros s income of the individual injured. (Section 28(b). NIRC and Sec. 63 Rev. Reg. No. 2)  ALTERNATIVE ANSWER: The income realized from the judgment is only the recovery for lost salaries. This constitutes taxable income because were it not for the injury, he could have received it from his employer as compensation income. All the other amounts received are either compensation for injuries or damages received on account of such injuries’ which are exclusions from gross income pursuant to Section 28(b)(5) of the  Tax Code. f) Income exempt under tax treaty g) Retirement benefits, pensions, gratuities, etc. 1. Company A decides to close its operations due to continuing losses and to terminate the se rvices of its employees. Under the Labor Code, employees who are separated from service for such cause are entitled to a minimum of one-half month pay for every year of service. Company A paid the equivalent of one month pay for every year of service and the cash equivalent of unused vacation and sick leaves as separation benefits.  Are such benefits taxable and subject to withholding tax under the Tax Code? Decide with reasons. (5%) SUGGESTED ANSWER: The separation benefits paid by Company A to its employees are excluded from gross income being in the nature of benefits given to employees whose services were terminated due to causes beyond their control. (Sec. 32(B)(6)(b), NIRC). The entire benefits, thus, are not taxable and not subject to withholding tax under the Tax Code. (BAR 2005) 2. To start a business of his own, Mr. Mario de Guzman opted for an early retirement from a private company after ten (10) years of service. Pursuant to the company's qualified arid approved private retirement benefit plan, he was paid his retirement benefit which was subjected to withholding tax. Is the employer correct in withholding the tax? Explain. (2%) SUGGESTED ANSWER: It depends. An employee retiring under a company's qualified and private retirement plan can only be exempt from income tax on his retirement benefits if the following requisites are met: (1) that the retiring employee must have been In service of the same employer for at least ten (10) years; (2) that he is not less than 50 years of age at the time of retirement; and (3) the benefit is availed of only once. In the instant case, there is no mention whether the employee has likewise complied with requisites number (2) and (3). Under what conditions are retirement benefits received by officials and employees of private firms excluded from gross income and exempt from taxation? (3%) Page | 81

SUGGESTED ANSWER: The conditions to be met in order that retirement benefits received by officials and employees of private firms are excluded from gross income and exempt from taxation are as follows: a.

Under Republic Act No. 4917 (those received under a reasonable private benefit plan): I. II. III.

b.

the retiring official or employee must have been in service of the same employer for at least ten (10) years; that he is not less than fifty (50) years of age at the time of retirement; and that the benefit is availed of only once.

Under Republic Act No. 7641 (those received from employers without any retirement plan): I.

Those received under existing collective bargaining agreement and other agreements are exempt; and

II.

In the absence of retirement plan or agreement providing for retirement benefits the benefits are excluded from gross income and exempt from income tax if: A. retiring employee must have served at least flve (5) years; and B. that he is not less than sixty (60) years of age but not more than sixty five (65). (BAR 2000)

3. Mr. Javier is a non-resident senior citizen. He receives a monthly pension from the GSIS. which he deposits with the PNB-Makati Branch. Is he exempt from income tax and therefore not required to file an income tax return? (5%) SUGGESTED ANSWER: Mr. Javier is exempt from income tax on his monthly GSIS pension (Sec. 32(B)(6)(f). NIRC of 1997) but not on the interest income that might accrue on the pensions deposited with PNB which are subject to final withholding tax. Consequently, since Mr. Javier’s sole taxable income would have been subjected to a final withholding tax, he is not required anymore to file an income tax return. [Sec. 51 (A) (2) (c). Ibid]. (BAR 2000) 4. X, an employee of ABC Corporation died. ABC Corporation gav e X’s widow an amount equivalent to Xs salary for one year. Is the amount considered taxable income to the widow? Why?  ANSWER: No. The amount received by the widow from the decedent’s employer may either be a gift or a separation benefit on account of death. Both are exclusions from gross income pursuant to provisions of Section 28(b) of the Tax Code.  ALTERNATIVE ANSWER: No. Since 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 U.S. tax case (Estate of Hellstrom vs. Commissioner, 24 T.C. 916), 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. The controlling facts which would lead to the conclusion that the amount received by the widow is not an income are as follows: Page | 82

a. b. c. d. e.

the gift was made to the widow rather than the estate: there was no obligation for the corporation to make further payments to the deceased; the widow had never worked for the corporation; the corporation received no economic benefit; and the deceased had been fully compensated for his services (Estate of Sydney Carter us. Commissioner, 453 F. 2d 61 (2d Cir. 1971). (BAR 1996)

5.  A, an employee of the Court of Appeals, retired upon reaching the compulsory age of 65 years. Upon compulsory retirement, A received the money value of his accumulated leave credits in the amount of P500,000.00. Is said amount subject to tax? Explain.  ANSWER: No. The commutation of leave credits, more commonly known as terminal leave pay, Le., the cash equivalent of accumulated vacation and sick leave credits given to an officer or employee who retires, or separated from the service through no fault of his own, is exempt from income tax. (BIR Ruling 238-91 dated November 8, 1991; Commissioner vs. CAandEfrenCastaneda, GRNo. 96016, October 17, 1991). (BAR 1996) 6. Mr. Jacobo worked for a manufacturing firm. Due to business reverses the firm offered 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 sala ry for every year of service. Mr. Jacobo accepted the offer and received P400.000.00 as separation pay under the program.  After all the employees 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 the service. He also received P400.000.00 as separation pay. Did Mr. Jacobo derive income when he received his separation pay? Explain.  ANSWER: Yes, Mr. Jacobo derived a taxable income when he received his separation pay because his separation from employment was voluntary on his part in view of his offer to resign. What is excluded from gross income is any amount received by an official or employee as a consequence of separation of such official or employee from the service of the employer for any cause beyond the control of the said official or employee (Sec 28, NIRC).  ALTERNATIVE ANSWER: No, Mr. Jacobo 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 employee’s control. The voluntary redundancy program requiring employees to make an offer to resign is only considered as a tool to expedite the lay-off of excess manpower whose services are no longer needed by the employer, but is not the main reason or cause for the termination. Did Mr. Kintanar derive income when he received his separation pay? Explain.  ANSWER: No. Mr. Kintanar did not derive any income when he received his separation pay because his separation from employment is due to causes beyond his control. The separation was involuntary as it was a Page | 83

consequence of the closure of various unprofitable departments pursuant to the redundancy program. (BAR 1995) 7. Mr. Quiroz worked as chief accountant of a hospital for forty-five years. When he retired at 65 he received retirement pay equivalent to two months’ salary for every year of service as provided in the hospital BIR approved retirement plan. The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was provided for in the hospital's retirement plan in view of his loyalty and invaluable services for forty-five years; hence, it resolved to pay him a gratuity of P1 Million over and above his retirement pay. The Commissioner of Internal Revenue taxed the P1 Million as part of the gross compensation income of Quiroz who protested that it was excluded from income because (a) it was a retirement pay Is Mr. Quiroz correct in claiming that the additional PI Million was retirement pay and therefore excluded from income? Explain. Is Mr. Quiroz correct in claiming that the additional PI Million was gift and therefore excluded from income? Explain.  ANSWER: No. The additional P1 million is not a retirement pay but a part of the gross compensation income of Mr. Quiroz. This is not a retirement benefit received in accordance with a reasonable private benefit plan maintained by the employer as it was not paid out of the retirement plan. Accordingly, the amount received in excess of the retirement benefits that he is entitled to receive under the BIR-approved retirement plan would not qualify as an exclusion from gross income. No. The amount received was in consideration of his loyalty and invaluable services to the company which is clearly a compensat ion income received on account of employment. Under the employer’s ‘motivation test,’ emphasis should be placed on the value of Mr. Quiroz services to the company as the compelling reason for giving him the gratuity, hence it should constitute a taxable income. The payment would only qualify as a gift if there is nothing but ‘good will, esteem and kindness' which motivated the employer to give the gratuity. (Stanton vs. U.S., 186 F. Supp. 393). Such is not the case in the herein problem.  ALTERNATIVE ANSWER: Yes. The 1 million is not compensation income subject to income tax but a gift from his employer. There was no evidence presented to show that he was not fully compensated for his 45 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. The PI million is purely a gratuity from the company. It is a taxable gift to the transferor. Under the Tax Code, gifts are excluded from gross income therefore exempt from income tax. (Sec. 28(b)(3). NIRC; Pirovano vs. Commissioner) (BAR 1995) 8. Pedro Reyes, an official of Corporation X, asked for an “earlier retirement” because he was emigrating to Australia. He was paid P2,000.000.00 as separation pay in recognition of his valuable service to the corporation. Juan Cruz, another official of the same company, was separated for occupying a redundant position. He was given PI.000,000.00 as separation pay. Jose Bautista was separated due to his failing eyesight. He was given P500,000.00 as separation pay. Page | 84

 All the three (3) were not qualified to retire under the BIR-approved pension plan of the corporation. (a) Is the separation pay given to Reyes subject to income tax? (b) How about the separation pay received by Cruz? (c) How about the separation pay received by Bautista?  ANSWER: (a) The separation pay given to Reyes is subject to income tax as compensation income because it arises from a service rendered pursuant to an employer-employee relationship. It is not considered an exclusion from gross income because the rule in taxation is tax construed in strictissi mijuris or the rule on strict interpretation of tax exemptions. (b) The separation pay received by Cruz is not subject to income tax because his separation from the company was involuntary (Sec. 28 b (7), Tax Code).

(c) The separation pay received by Bautista is likewise not subject to tax. His separation is due to disability, hence involuntary.

Under the law, separation pay received through involuntary causes is exempt from taxation. (BAR 1994) 9. Born of a poor family on 14 February 1944. Mario worked his way through college. After working for more than 2 years in X Manufacturing Corporation, Mario decided to retire and avail of the benefits under the very reasonable retirement plan maintained by his employer. He planned to invest whatever retirement benefits he would receive in a business that will provide his employer with the needed raw materials. On the day of his retirement on 30 April 1985. he received P400.000.00 as retirement benefit. In addition, his endowment insurance policy, for which he was paying an annual premium of PI.520.00 since 1965, also matured. He was then paid the face value of his insurance policy in the amount of P50.000.00. Is Mario’s P400.000.00 retirement benefit subject to income tax?

 ANSWER: Mario’s P400.000.00 retirement benefit is subject to income tax. To be exempt, the retirement pay must have been extended to an employee who is at least 50 years of age and who would have worked for at least ten (10) years with the employer. The amount cannot be considered as a separation pay that would have exempted benefits from income tax since it was Mario who had decided to retire instead of being required to do so (Sec. 28. NIRC) (BAR 1991) 10. Delstar Emmanuel Perez, a government employee, retires from the service upon reaching the compulsory retirement age of 65. Would the amount he is entitled to receive by way of commutation of his accumulated leave credits, of his terminal leave pay, be subject to income tax?  ANSWER: The amount that Emmanuel Perez is to receive should not be subjected to income tax, and such was the ruling by the Supreme Court in the In Re Zialcita Administrative Case (Adm. Matter No. 90-6015-SC, 18 Oct. 1990). The ruling apparently repudiated, or at least is inconsistent with, its earlier decision in Commissioner vs. Victoriano (G.R. No. 83176, 10 August 1989). (BAR 1991) h) Winnings, prizes, and awards, including those in sports competition 1. Jose Miranda, a young artist and designer, received a prize of P100.000.00 for winning in the onthe-spot peace poster contest sponsored by a local Lions Club. Shall the reward be included in the gross income of the recipient for tax purposes? Explain. (3%) Page | 85

SUGGESTED ANSWER: No. It is not includable in the gross income of the recipient because the same is subject to a final tax of 20%, the amount thereof being in excess of P10.000 (Sec. 24(B)(1), NIRC of 1997). The prize 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. [Sec. 32 (B) (7) (c), NIRC of 1997] Since it is an on-the-spot contest, it is evident that he must have joined the contest in order to earn the prize or award. (BAR 2000) 2. Is the prize of one million pesos awarded by the Reader's Digest subject to withholding of final tax? Who is responsible for withholding the tax? What are the liabilities for failure to withhold such tax? (5%) SUGGESTED ANSWER: a) It depends. If the prize is considered as winnings derived from sources within the Philippines, it is subject to withholding of final tax (Sec. 24[B] in relation to Sec. 57[A], NIRC). & derived from sources without the Philip-pines, it is not subject to withholding of final tax because the Philippine tax law and regulations could not reach out to foreign jurisdictions. b) The tax shall be withheld by the Reader's Digest or local agent who has control over the payment of the prize. c) Any person required to withhold or who willfully fails to withhold, shall, in addition to the other penalties provided under the Code, be liable upon conviction to a penalty equal to the total amount of tax not withheld (Sec. 251, NIRC). In case of failure to withhold the tax or in the case of under withholding, the deficiency tax shall be collected from the payor/withholding agent (1st par.. Sec. 2.57(A), R.R. No. 2-98). Any person required under the Tax Code or by rules and regulations to withhold taxes at the time or times required by law or rules and regulations shall, in addition to other penalties provided by law, upon conviction be punished by a fine of not less than Ten thousand pesos (Phpl0,000) and suffer imprisonment of not less than one (1) year but not more than ten (10) years (1st par., Sec. 255, NIRC). Comment: It is suggested that any of the following answers to the question, “What are the liabilities for failure to withhold such a tax?” be given full credit: 1. The payor shall be liable for the payment of the tax which was not withheld. 2. The payor/withholding agent shall be liable to both civil and criminal penalties imposed by the Tax Code. (BAR 1998) 3. Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council, a sports association duly accredited by the Philippine Boxing Association. Onyoc received the amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to collect income tax on the amount received by Onyoc and donor’s tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.  ANSWER: The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the income t ax. RA. No. 7549 explicitly provides that “All prizes and awards granted to athletes in local and International sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax".

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Neither is the BIR correct in collecting the donor’s tax from Ayala Land Corporation. The law is clear when it categorically stated “That the donor’s of said prizes and awards shall be exempt from the payment of the donor’s tax." (BAR 1996) (iii) Under special laws

a) Personal Equity and Retirement Account g. Deductions from gross income 1. Distinguish “Exclusion from Gross Income" from “Deductions From Gross Income”. Give an example of each. (2%) SUGGESTED ANSWER: Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross income, for purposes of computing the taxpayeris taxable income, due to the following reasons: (1) It is exempted by the fundamental law; (2) It is exempted by statute; and (3) It does not come within the definition of income. (Section 61, RR No. 2). Deductions from gross income, on the other hand, are the amounts, which the law allows to be deducted from gross income in order to arrive at net income. Exclusions pertain to the computation of gross income, while deductions pertain to the computation of net income. Exclusions 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. Example of an exclusion from gross income is proceeds of life insurance received by the beneficiary upon the death of the insured which is not an income or 13th month pay of an employee not exceeding P30.000 which is an income not recognized for tax purposes. Example of a deduction is business rental. (BAR 2001) (1) General rules (i) Deductions must be paid or incurred in connection with the taxpayer’s trade, business or profession 1. Sometime in December 1980, a taxpayer donated to his son 3,000 shares of stock of San Miguel Corporation. For failure to file a donor’s return on the donation within the statutory period, the taxpayer was assessed the sum of PI02,000.00, as donor’ s tax plus 25% surcharge or P25.500.00 and 20% interest or P20.400.00which he paid on June 24. 1985. On April 10, 1986, he filed his income tax return for 1985 claiming among others, a deduction for interest amounting to P9.500.00 and reported a taxable income of P96.000.00. On November 10. 1986, the taxpayer filed an amended income tax return for the same calendar year 1985, claiming therein an additional deduction in the amount of P20.400.00 representing interest paid on the donor’s gift tax.  A claim for refund of alleged overpaid income tax for 1985 was filed with the Commissioner which was subsequently denied. Upon appeal with the Court of Tax Appeals, the Commissioner took Issue with the Court of Tax  Appeal’s determination that the amount paid by the taxpayer for interest on his delinquent taxes is deductible from the gross income for the same year pursuant to Sec. 29 (b) (1) of the National Internal Revenue Code. The Commissioner of Internal Revenue pointed out that a tax is not an indebtedness. He argued that there is a fundamental distinction between a “tax" and a "debt". Ac cording to the Page | 87

Commissioner, the deductibility of “interest on indebtedness from a person’s income tax cannot extend to interest on taxes."

What is your opinion on the argument of the Commissioner that a tax is not an indebtedness so that deductibility on the interest on taxes should not be allowed?  ANSWER: The Commissioner’s argument is misplaced because the interest on the donor’ s tax is not one that can be considered as having been incurred in connection with the taxpayer’s trade, business or exercise of profession.  ALTERNATIVE ANSWER: a) While a tax may be considered a debt for purposes of deducting from gross income, the interest on taxes cannot be so considered, as such interest is in the nature of a penalty, the imposition of which is designed to discourage delinquent payment of taxes. To allow the deductibility of such interest would be to diminish the punitive and deterrent effects of the imposition, and thus to diminish the importance of the prompt payment of taxes. b) The argument of the Commissioner is wrong. Because while a tax as a general rule is not a debt, interest on a non-payment of a tax has been considered like interest on indebtedness by the Supreme Court. (Note: Whether or not the interest is deductible under the present aw no apparently in question). (BAR 1992)

(ii) Deductions must be supported by adequate receipts or invoices (except standard

deduction) (iii) Additional requirement relating to withholding (2) Return of capital (cost of sales or services) (i) Sale of inventory of goods by manufacturers and dealers of properties (ii) Sale of stock in trade by a real estate dealer and dealer in securities (iii) Sale of services (3) Itemized deductions (i) Expenses a) Requisites for deductibility 1. The Filipinas Hospital for Crippled Children is a charitable organization. X visited the hospital, on his birthday, as was his custom. He gave P100,000.00 to the hospital and P5.000.00 to a crippled girl whom he particularly pitied. A crippled son of X is in the hospital as one of its patients. X wants to exclude both the P100,000.00 and the P5.000.00 from his gross income. Discuss.  ANSWER: Under Sec. 29 (h) 11) of the National Internal Revenue Code charitable contributions to be deductible must be: a. actually paid or made to domestic corporations or associations organized and operated exclusively for

religious. charitable, scientific, youth and sports development, cultural or educational purposes or for rehabilitation of veterans or to social welfare institutions no part of which inures to the benefit of any private individual; b. made within the taxable year; c. not more than 6% (for individuals) of 3% (for corporations) of the taxpayer’s taxable income to be computed without including the contribution. Applying the above-provisions of law to the case at bar, it is clear therefore that only the PI00,000.00 contribution of X to Filipinas Hospital for Crippled Children qualified as a deductible contribution. Page | 88

Sec. 29 (h) (1) of the NIRC expressly provides that the same must be actually paid to a charitable organization to be deductible. Note that the law accorded no privilege to similar contributions extended to private individuals. Hence, the P5,000.00 contribution to the crippled girl cannot be claimed as a deduction.  ALTERNATIVE ANSWER: a) The P100,000.00 donation may properly be de ducted from X’s gross income, but not the P5.000.00 donated to the crippled girl, as charitable and other contributions that may be deducted from taxable income do not contem plate those given to individuals. While it may be that X’s son is a patient in the hospital, it cannot be said that part of its net income inures to the benefit of X as to be disallowed as a deduction from taxable income. b) Assuming X is a self-employed Individual, he may not deduct the donations made because under

Section 29 of the NIRC as amended by RA 7496 better known as SNITS, only contribution to the government or to an accredited relief organization for the rehabilitation of calamity stricken areas declared by the President may be deducted for income tax purposes. Clearly, the donees do not qualify as relief organizations. Assuming X is receiving purely compensation income, he can only deduct from gross compensation income personal exemption, additional personal exemption and special additional personal exemption (Section 29. NIRC as amended). Note: The problem does not refer to any particular taxable period, so if the contributions were effected prior to the effectivity of R.A. 7496, then the contribution of P100,000.00 can be allowed, subject to the limitations prescribed under Sec. 29 (h) (i) of the NIRC. (BAR 1993) 2. X just hurdled the bar examinations and immediately engaged in the practice of law. In preparing his income tax return, he listed the following as deductible items: (a) fees paid to the Supreme Court to be able to take the bar examinations; (b) fees paid to a law school to enroll in its pre- bar review classes; (c) malpractice insurance and (d) amount spent to entertain a judge who decided his first case. Which deductions are allowable? Reasons.  ANSWER: Sec. 29 of the National Internal Revenue Code on deductions, among other things provides: "(a) Expenses (1) Business Expenses (a) In general - All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; travelling expenses while away from home in the pursuit of a trade, profession or business; rentals or other payments required to be made as a condition to the continued use or possession, for the purpose of the trade, profession or business of property to which the taxpayer hasnot taken nor is not taking title or in which he has no equity." Further, Sec. 69 of Revenue Regulations No. 2.as amended, otherwise known as “Income Tax Regulations" reads: “Sec. 69. Professional Expenses –  A professional may claim as deductions the cost of supplies used by him or in the practice of his profession, expenses paid in the operation and repair of transportation equipment used in making professional calls, dues to professional societies and subscriptions to professional journals, the rent paid for office rooms, the expenses of the fuel, light, water, telephone, etc. used on such offices, and the hire of office assistants. Amounts currently expended for books, furnitures and professional instruments and equipment, the useful life of which is short, may be deducted. But Page | 89

amounts expended for books, furniture and professional instruments and equipment of a permanent character are not allowable deductions." From the foregoing provisions of law that ordinary and necessary expenses incurred during a taxable year pertaining directly to the practice of a profession may be allowed as deductions, it may be inferred from a keen reading of Sec. 69 of Revenue Regulations No. 2 that aside from personal exemptions, only direct costs or overhead expenses incurred in the actual practice of a profession may be claimed, i.e. supplies, fuel, light, electricity, salaries, etc. Applying the above considerations in the case at bar, it appears that among the expenses incurred by X. only the premiums he paid for malpractice insurance qualifies as a deductible expense, the same being an ordinary and necessary expense in the pursuit of a profession as defined by Sec. 29 of the NIRC and further qualified by Revenue Regulations No. 2. The tuition fees for pre-bar classes and the bar examination fees paid to the Supreme Court by X do not qualify as deductible expenses under Revenue Regulations No. 2. As for the amount spent by X to entertain the judge who decided his first case, the same may not be claimed as an expense. A business expense to be deductible must be sustained by adequate proof and that the same must not be against the law or public policy [Consolidated Mines, Inc. us. Court of Tax Appeals, L-18863 29 August 1974). Moreover, it may be worthwhile to note that under Sec. 3 (B) of Revenue Regulations No. 2-93, implementing Republic Act No. 7496, otherwise known as “An Act Adopting The Simplified Net Income Taxation Scheme for the Self-Employed and Professionals Engaged In the Practice Of Their Profession, amending Section 21 and 29 of the National Internal Revenue Code, as amended", only the following direct costs are deductible: a. Raw materials b. Salaries of employees directly performing services for the taxpayer in the course of or pursuant to

his business or practice of his profession. This includes salaries and wages paid for janitorial, security, bookkeeping, administrative and sales personnel, by a self-employed taxpayer or a professional in the exercise of his profession: c. telecommunication, electricity, fuel, light and water; d. business rental; e. depreciation; f. Contribution made to the Government and accredited relief organizations for the rehabilitation of calamity- stricken areas declared by the President. The deductibility of the contributions is based on two criteria, to wit: 1. The donee or recipient must be the government or accredited relief organization: and 2. The contribution must be utilized for the rehabilitation of calamity-stricken areas declared by the President. The term “Government" as used in the law refers to the Philippines or any of its agencies or political subdivisions and includes: i. Departments, agencies, bureaus, commissions and authorities, including state colleges and universities: ii. Autonomous regions, provincial, city or municipal governments; g. Interest paid or accrued within a taxable year on loans contracted from accredited financial

institutions which must be proven to have been paid or incurred in connection with the conduct of a taxpayer's profession, trade or business.  ALTERNATIVE ANSWER: None of the expenses are allowable. With respect to individuals engaged in the practice of a profession, the NIRC limits deductions only to direct costs incurred in the exercise of the profession, which costs do Page | 90

not include the items being claimed by X. Note: Again, the problem did not refer to any particular taxable period. (BAR 1993) 3. X’s favorite charity organization is the Philippine Na tional Red Cross. To raise money, PNRC sponsored a concert featuring the Austria Boys Choir. X advanced P100,000.(X) to the PNRC for which he was issued a promissory note. Before its maturity, X cancelled and returned the note to PNRC. An advertising man, X also undertook the promotions of the Austria Boys Choir. Part of the promotions campaign was to ask prominent personalities to publicly donate blood to the PNRC a day before the concert. X himself donated 100 cc of blood. X intends, to claim as deductions the value of the note, the cash value of the promotions campaign and the cash value of the blood he donated. Give your legal advice.  ANSWER: The value of the note can be claimed as deduction as charitable contribution. While the amount was originally a loan, it can be considered to have become a gift or contribution when X cancelled and returned the note to PNRC, a charitable organization. On the other hand, the cash value of the promotions campaign cannot be claimed as a deduction. Advertising expenses can only be deducted from the revenues where the expenses was incurred. In the case at hand, PNRC is the revenue-producing entity not X. X did not derive any revenue. Thus, the cash value of his promotions campaign cannot be claimed as deduction. Finally, the cash value of the blood donated by X cannot be claimed as deduction. Blood has no monetary value in this case as it is not disbursed in the form of expense.  ALTERNATIVE ANSWERS: a) The value of the note qualifies as a contribution to a charitable institution which may be deducted from gross income but only to the extent that it does not exceed 6% of his taxable income derived from business. X cannot claim deductions for the other items. Charitable and other contributions, to be deductible, must actually have been paid, which is not true of the value of the advertising promotions, and must represent some economic benefit to the recipient, which is not true of the blood donation. b)

Section 29 as amended by RA 7496 allows the deduction of donation to an accredited relief organization for the rehabilitation of calamity stricken areas declared by the President. Clearly, the PNRC will qualify as donee relief organization. The P100,000.00 - note maybe allowed to the extent of its cash value considering that the maker of the note is the donee itself. The rule is, donation made in kind shall be determined at its fair market value as of the date such donations or gifts are made. (Section 10 BIR-NEDA Regulation 1-81) The services rendered by the taxpayer to promote the show and the 100 cc. blood may not be allowed because of the difficulty in getting the fair-market value of these noncash donations.

Note: If the donation is made before the effectivity of RA. 7496. It is deductible but subject to limitations under Sec. 29 h (i) of the NIRC. (BAR 1993) 4. X is the proprietor of Vanguard, which is a security and detective agency. X was able to get the contract to provide the security services of a government agency. He signed the Security  Agreement with the director of the government agency calling for the deployment of 100 security guards on a 24 hour basis. The contract was revocable at the will of the director. To please the director, X gives him at the end of the month P100,000.00 per guard hired. May X deduct from his Page | 91

income the money he paid to the director? Reasons.  ANSWER: The money paid to please the director is not deductible. This is a form of bribery. Deductions shall not be allowed if the expense is contrary to law, public policy or for immoral purposes (Zamora vs. Collector, SCRA 163; Roxas vs. CTA, 23 SCRA 276).  ALTERNATIVE ANSWERS: a) No. The money given to the director was paid merely “to please" him and was not paid for services actually rendered and therefore does not qualify as compensation for services deductible as ordinary and necessary expense. Moreover, deductions are allowable only if incurred for legal purposes. b) No. A taxpayer may not deduct a business expense which is against the law or public policy. The

payment made to the director is a bribe given to a government employee. Bribery is a crime punishable under the Revised Penal Code. (BAR 1993)

(a) Nature: ordinary and necessary 1. X is the Advertising Manager of Mang Douglas Hamburger, Inc. X had dinner with Y, owner of a chain of restaurants, to convince the latter to carry Mang Douglas’ hamburger. After Y agreed, both X and Y went their separate ways. X celebrated by going to a single’s bar. He picked up a partner and consumed a bottle of beer. He drove home at 3:00 a.m. On his way, he sideswiped a pedestrian who died as a result of the accident. X settled the case extrajudicially by paying the heirs of the pedestrian P50.000.00. The money, however, came from Mang Douglas Hamburger, Inc. Discuss whether the P50.000.00 can be claimed by Mang Douglas Hamburger, Inc. as an ordinary and necessary expense.  ANSWER: No. As the expenditure had not been incurred in carrying on his trade or business, the same cannot be considered an ordinary and necessary expense for which deduction may be claimed. Such expense is a personal expense which is not deductible from the gross income.  ALTERNATIVE ANSWERS: (a) In the case of Helvering vs. Humpton (1935; CCA 9th 79F [2dl 358, it was held that: “Restitution is ordinarily expected to be made by a person in the course of whose business a wrong is committed, so that he may deduct the amount thereof as an ordinary and necessary’ business expense."

In the case at bar, the money advanced by Mang Douglas Hamburger, Inc. to pay off the civil liability of X, which arose from the accident after a business deal has been struck for Mang Douglas Hamburger, Inc. was in fact reparation/restitution to the aggrieved heirs. However, the same cannot be considered as an ordinary and deductible expense, since the law poses as a condition for its deductibility that the wrong or tort should have been committed in the course of the business. (b) If Mang Douglas Hamburger, Inc. treats the advances as salary or compensation of Y who is an employee of Mang Douglas and withholds the corresponding tax thereon then there is a possibility of deducting. (BAR 1993)

(b) Paid and incurred during taxable year (c) Others (not in the syllabus) Page | 92

1. In order to facilitate the processing of its application for a license from a government office, Corporation A found it necessary to pay the amount of Php 100,000 as a bribe to the approving official. Is the Php 100,000 deductible from the gross income of Corporation A? On the other hand, is the Php 100,000 taxable income of the approving official? Explain your answers. (5%) SUGGESTED ANSWER: Since the amount of Php 100,000 constitutes a bribe, it is not allowed as a deduction from gross income of Corporation A- (Section 34(A)(1)(c), NIRC). However, to the recipient government official, the same constitutes a taxable income. All income from legal or illegal sources are taxable absent any clear provision of law exempting the same. This is the reason why gross income had been defined to include income from whatever source derived. (Section 32(A), NIRC). Illegally acquired income constitutes realized income under the claim of right doctrine (Rutkin v. US, 343 US 130). (BAR 2001) 2. MC Garcia, 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. Are these expenses allowable as deduction from gross income? [5%] SUGGESTED ANSWER: No. The alleged facilitation fees which he claims as standard operating procedure in transactions with the government comes in the form of bribes or "kickback” which are not allowed as deductions from gross income (Section 34(A)(1)(c). NIRC). (BAR 1998) b) Salaries, wages and other forms of compensation for personal services actually rendered, including the grossed-up monetary value of the fringe benefit subjected to fringe benefit tax which tax should have been paid 1. Gold and Silver Corporation gave extra 14th month bonus to all its official and employees in the total amount of P75 Million. When it filed 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 BIR the following year, it disallowed as item of deduction the P75 Million bonus the corporation gave its officials and employees on the ground of unreasonableness. The corporation claimed that the bonus is an ordinarily and necessary expense that should be allowed. If you were the BIR Commissioner, how will you resolve the issue? 5% SUGGESTED ANSWER: I will rule against the deductibility of the bonus. The extra bonus is both not normal to the business and unreasonable. Admittedly, there is no fixed test for determining the reasonableness of a bonus as an additional compensation. This depends upon many factors such as: the payment must be made in good faith; the character of the taxpayer’s business; t he volume and amount of its net earnings; its locality; the type and extent of the services rendered; the salary policy of the corporation; the size of the particular business; the employees’ qualification and contributions to the business venture, and gen eral economic conditions (C.M Hoskins and Co., Inc. v. CIR, 30 SCRA 434 [1969]. Giving an extra bonus at a time that the company suffers operating losses is not a payment in good faith and is not normal to the business, hence unreasonable and would not qualify as ordinary and necessary expense. (BAR 2006) c) d) e) f) g) h) i) j)

Travelling/transportation expenses Cost of materials Rentals and/or other payments for use or possession of property Repairs and maintenance Expenses under lease agreements Expenses for professionals Entertainment/Representation expenses Political campaign expenses Page | 93

1. X is a friend of Y, the chairman of Political Party Z, who wants to run for President in the 2004 elections. Knowing that Y needs funds for posters and streamers, X is thinking of donating to Y P150,000.00 for his campaign. He asks you whether his intended donation to Y will be subject to the donor’s tax. What would your answer be? Will your answer be the same if he were to donate to Political Party Z instead of to Y directly? SUGGESTED ANSWER: The donation to Y, once he becomes a candidate for an elective post, is not subject to donor's tax provided that he complies with the requirement of filing returns of contributions with the Commission on Elections as required under the Omnibus Election Code. The answer would be the same if X had donated the amount to Political Party Z instead of to Y directly because the law places in equal footing any contribution to any candidate, political party or coalition of parties for campaign purposes. (Section 99(C) of the 1997 Tax Code). (BAR 2003) 2.  Are contributions to a candidate in an election subject to donor's tax? On the part of the contributor, is it allowable as a deduction from gross income? [5%] SUGGESTED ANSWER: a) No. provided the recipient candidate had complied with the requirement for filing of returns of contributions with the Commission on Elections as required under the O mnibus Election Code. b) The contributor is not allowed to deduct the contributions because the said expense is not directly attributable to, the development, management, operation and/or conduct of a trade, business or profession (Sec. 34[Al(l)(a), NIRC). Furthermore, if the candidate is an incumbent government official or employee, it may even be considered as a bribe or a kickback (Sec. 34[A](I)(c), NIRC). Comment: It is suggested that full credit should be given for any answer to the first question because the answer requires an interpretation of the Election Code. Pursuant to the provisions of Section 99(C) of the NIRC, the taxability of this type of contributions/donations is governed by the Election Code. (BAR 1998) k) Training expenses l) Advertising expenses 1. Masarap Food Corporation (MFC) incurred substantial advertising expenses in order to protect its brand franchise for one of its line products. In its income tax return, MFC included the advertising expense s deduction from gross income, claiming it as an ordinary business expense. Is MFC correct? Explain. (3%) SUGGESTED ANSWER: No. The protection of taxpayer’s brand franchise is analogous to the maintenance of goodwill or title to one’s property which is in the nature of a capital expenditure. An advertisi ng expense, of such nature does not qualify as an ordinary business expense, because the benefit to be enjoyed by the taxpayer goes beyond one taxable year fCIR v. General Foods Inc., 401 SCRA 545 [2003]). (BAR 2009) (ii) Interest

1.  A Co., a Philippine corporation. Issued preferred shares of stock with the following features: 1. Non-voting; 2. Preferred and cumulative dividends at the rate of 10% per annum, whether or not in any period the amount is covered by earnings or projects; Page | 94

3. In the event of dissolution of the issuer, holders of preferred stock shall be paid in full or ratably as the assets of the issuer may permit before any distribution shall be made to common stockholders; and 4. The issuer has the option to redeem the preferred stock.  A Co. declared dividends on the preferred stock and claimed the dividends as interests’ deductible from its gross income for income tax purposes. The BIR disallowed the deduction. A Co. maintains that the preferred shares with their features are really debt and therefore the dividends are really interests. Decide. (10%)

SUGGESTED ANSWER: The dividends are not deductible from gross income. Preferred shares shall be considered capital regardless of the conditions under which such shares is issued and, therefore, dividends paid thereon are not considered interests which are allowed to be deducted from the gross income of the corporation. (Revenue Memorandum Circular No. 17-71, July 12, 1971). (BAR 1999) a) Requisites for deductibility 1. Pursuant to the National Internal Revenue Code, for interest to be deductible, what are the requirements to be met? Explain.  ANSWER: For interest to be deductible, the following requirements must be met: (a) That there must be an indebtedness: (b)That there is an interest on such indebtedness: (c) Such interest was paid or accrued within the taxable year (d) Interest was paid on a debt related to one’s profession, trade or business. (BAR 1992) b) Non-deductible interest expense 1. Sometime in December 1980, a taxpayer donated to his son 3,000 shares of stock of San Miguel Corporation. For failure to file a donor’s return on the donation within the statutory period, the taxpayer was assessed the sum of PI02,000.00, as donor’s tax plu s 25% surcharge or P25.500.00 and 20% interest or P20.400.00which he paid on June 24. 1985. On April 10, 1986, he filed his income tax return for 1985 claiming among others, a deduction for interest amounting to P9.500.00 and reported a taxable income of P96.000.00. On November 10. 1986, the taxpayer filed an amended income tax return for the same calendar year 1985, claiming therein an additional deduction in the amount of P20.400.00 representing interest paid on the donor’s gift tax.  A claim for refund of alleged overpaid income tax for 1985 was filed with the Commissioner which was subsequently denied. Upon appeal with the Court of Tax Appeals, the Commissioner took Issue with the Court of Tax  Appeal’s determination that the amount paid by the taxpayer for interest on his delinquent taxes is deductible from the gross income for the same year pursuant to Sec. 29 (b) (1) of the National Internal Revenue Code. The Commissioner of Internal Revenue pointed out that a tax is not an indebtedness. He argued that there is a fundamental distinction between a “tax" and a "debt". Ac cording to the Commissioner, the deductibility of “interest on indebtedness from a person’s income tax cannot extend to interest on taxes." Page | 95

What is your opinion on the argument of the Commissioner that a tax is not an indebtedness so that deductibility on the interest on taxes should not be allowed?  ANSWER: The Commissioner’s argument is misplaced because the interest on the donor’s tax is not one that can be considered as having been incurred in connection with the taxpayer’s trade, business or exercise of profession.  ALTERNATIVE ANSWER: c) While a tax may be considered a debt for purposes of deducting from gross income, the interest on taxes cannot be so considered, as such interest is in the nature of a penalty, the imposition of which is designed to discourage delinquent payment of taxes. To allow the deductibility of such interest would be to diminish the punitive and deterrent effects of the imposition, and thus to diminish the importance of the prompt payment of taxes. d) The argument of the Commissioner is wrong. Because while a tax as a general rule is not a debt, interest on a non-payment of a tax has been considered like interest on indebtedness by the Supreme Court. (Note: Whether or not the interest is deductible under the present aw no apparently in question). (BAR 1992) c) Interest subject to special rules (a) Interest paid in advance (b) Interest periodically amortized (c) Interest expense incurred to acquire property for use in trade/business/profession 1. Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the expense. (5%) Interest on loans used to acquire capital equipment or machinery. SUGGESTED ANSWER: This is a deductible item from gross income. The law gives the taxpayer the option to claim as a deduction or treat as capital expenditure interest incurred to acquire property used in trade, business or exercise of a profession. (Section 34(B) (3), NIRC). (BAR 1999) (d) Reduction of interest expense/interest arbitrage (iii) Taxes

1. Distinguish between the legal concept of "taxes" and "debts".  ANSWER: A tax may be considered a debt in the Civil Code sense for the following purposes: a) Collection being enforced by court action: b) Statute of limitations: and c) Deduction from gross income.

Strictly speaking, however, a tax is not a debt in that there can be no set-off between the taxpayer and the Government. (BAR 1992) a) Requisites for deductibility b) Non-deductible taxes c) Treatments of surcharges/interests/fines for delinquency Page | 96

d) Treatment of special assessment e) Tax credit vis-à-vis deduction 1. Congress enacts a law granting grade school and high school students a 10% discount on all schoolprescribed textbooks purchased from any bookstore. The law allows bookstores to claim in full the discount as a tax credit. 2. Can the BIR require the bookstores to deduct the amount of the discount from their gross income? Explain. 2.5% SUGGESTED ANSWER: 2. No. Tax credit which reduces the tax liability is different from a tax deduction which merely reduces the income to arrive at the tax base. Since the law allowed bookstores to claim in full the discount as a tax credit, the BIR is not allowed to expand or contract the legislative mandate (CIR v. Central Luzon Drug Corp., Id.). (BAR 2006) (iv) Losses

a) Requisites for deductibility 1. Give the requisites for deductibility of a loss. [5%] SUGGESTED ANSWER: The requisites for deductibility of a loss are a) loss belongs to the taxpayer; b) actually sustained and charged off during the taxable year; c) evidenced by a closed and completed transaction; d) not compensated by insurance or other forms of indemnity; e) not claimed as a deduction for estate tax purposes in case of individual taxpayers; and f) if it is a casualty loss it is evidenced by a declaration of loss filed within 45 days with the BIR. Comment: The question is vague. There are different kinds of losses recognized as deductible under the Tax Code. These are losses, in general (Sec. 34[D](I); net operating loss carryover (Sec. 34[D](3); capital losses (Sec. 34[D](4); Losses from wash sales of stocks or securities (Sec. 34[D](5) in relation to Sec. 38); wagering losses (Sec. 34(D)(6); and abandonment losses (Sec. 34(D)(7). Losses are also deductible from the gross estate (Sec. 86(A)(1)(e). NIRC). Considering the time allotted for a five (5) point question is only nine (9) minutes, the candidates would not be able to write down a complete answer. It is suggested that any answer which states the requisites for the deductibility of any of the above losses be given full credit. (BAR 1998) 2. X is a travelling salesman in Jolo, Sulu. In the course of his travel, a band of MNLF seized his car by force and used it to kidnap a foreign missionary. The next day, X learned that the military and the MNLF band had a chance encounter. Using heavy weapons, the military fired at the MNLF band that tried to escape with the use of X’s car. All the members of the band died and X’s car was a total wreck. Can X deduct the value of his car from his income as casualty loss? Reasons.  ANSWER: Sec. 29 (i) (c) of the National Internal Revenue Code provides that in cases of individual taxpayers, losses to be deductible must be: a) actually sustained and charged off within the taxable year; b) have been incurred in trade, profession or business or in any transaction entered into for profit,

though not connected with trade, profession, or business; c) Moreover, Sec. 1 of Revenue Regulations No. 12-77, defined casualty as complete or partial destruction of property resulting from an Identifiable event of sudden, unexpected, or unusual nature. Page | 97

It denotes accidents, some sudden Invasion by hostile agency, and excludes progressive deterioration. Based on the above-mentioned laws and the circumstances of the case at bar, the value of the wrecked car is deductible as casualty loss, provided the regulations governing substantiation requirements for losses are complied with.  ALTERNATIVE ANSWERS: a) No. With respect to individuals engaged in business, the NIRC limits deductions only to certain direct costs incurred In connection with the business, which costs, however, do not include casualty losses. b) No. Section 29 of the NIRC, as amended by RA7496, better known as the SNTTS, does not include

among the allowable items of deductions for self-employed individuals like X, casualty losses even if the property destroyed is used in business. A taxpayer claiming deduction must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows (Adas Consolidated Mining, 102 SCRA 246). Note: It depends. If he is an employee of a company, that is not deductible. On the other hand, if he is a businessman it will be deductible to his gross income provided he can recover only up to the amount of the casualty loss that does not exceed its book value, provided further, that it is not compensated by insurance or otherwise. Under the SNITS Law (R-A 7496) losses of any kind are no longer deductible from gross income of individuals. (BAR 1993) b) Other types of losses (a) Capital losses 1. What is the rationale for the rule prohibiting the deduction of capital losses from ordinary gains? Explain. 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 requirement of the law that only necessary expenses are allowed as deductions from gross income. The term “necessary expenses” 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. This is also the reason why all nonbusiness connected expenses like personal, living and family expenses, are not allowed as deduction from gross income (Section 36(A)(1) of the 1997 Tax Code).  ALTERNATIVE ANSWER: The prohibition of deduction of capital losses from ordinary gains is designed to forestall the shifting of deductions from an area subject to lower taxes to an area subject to higher taxes, thereby unnecessarily resulting in leakage of tax revenues. Capital 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 (Rule on Holding Period). 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 subject to a higher rate of income tax. (Chirelstein, Federal Income Taxation, 1977 Ed.) (BAR 2003) (b) Securities becoming worthless 1. Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the deduction. (5%) Page | 98

Worthless securities SUGGESTED ANSWER: Worthless securities, which are ordinary assets, are not allowed as deduction from gross income because the loss is not realized. However, 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. (Section 34(D)(4), NIRC). This deduction, however, is not allowed to a bank or trust company. (Section 34(B)(2), NIRC). (BAR 1999) (c) Losses on wash sales of stocks or securities (d) Wagering losses (e) Net Operating Loss Carry-Over (NOLCO) (v) Bad debts

1. PQR Corp. claimed as a deduction in its tax returns the amount of PI, 000,000 as bad debts. The corporation was assessed by the Commissioner of Internal Revenue for deficiency taxes on the ground that the debts cannot be considered as “worthless," hence they do not qualify as bad debts. The company asks for your advice on “What factors will hold in determining whether or not the debts are bad debts?" Answer and explain briefly. (5%) 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, objective business judgment that there remained no practical, but only vaguely theoretical, prospect that the debt would ever be paid (Collector of Internal Revenue v. Goodrich International Rubber Co*, 21 SCRA 1336 [1967/). "Worthless" is not determined by an inflexible formula or slide rule calculation, but upon the exercise of sound business judgment. The factors to be considered include, but are not limited to, the following: 1. 2. 3. 4.

The debtor has neither property nor visible income; The debtor has been adjudged bankrupt or insolvent; Collateral shares have become worthless; and There are numerous debtors with small amounts of debts and further action on the accounts would entail expenses exceeding the amounts sought to be collected.

 ALTERNATIVE ANSWER: The following are the factors to be considered in determining whether or not the debts are bad debts: 1. 2. 3. 4.

The debt must be valid and subsisting; The debt is connected with the taxpayer's ■  trade or business, and is not between related parties; There is an actual ascertainment that the debt is worthless; and The debt is charged-off within the taxable year. (PRC v. CA, 256 SCRA 667 11996]; Revenue Regs. No. 5-99). (BAR 2004)

2. Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the deduction. (5%) Reserves for bad debts. SUGGESTED ANSWER: Page | 99

Reserve for bad debts are not allowed as deduction from gross income. Bad debts must be charged off during the taxable year to be allowed as deduction from gross income. The mere setting up of reserves will not give rise to any deduction. (Section 34(B), NIRC). (BAR 1999) a) Requisites for deductibility b) Effect of recovery of bad debts 1. Explain briefly whether the following items are taxable or non- taxable: Recovery of bad debts previously charged off; SUGGESTED ANSWER: Recovery of bad debts previously charged off is taxable to the extent of income tax benefit of said deduction. (Sec. 34(E)(1), NIRC). (BAR 2005) (vi) Depreciation

1. Explain if the following items are deductible from gross income for income tax purposes. Disregard who is the person claiming the expense. (5%) Depreciation of goodwill. SUGGESTED ANSWER: Depreciation for goodwill is not allowed as deduction from gross income. While intangibles maybe allowed to be depreciated or amortized, it is only allowed to those intangibles whose use in the business or trade is definitely limited in duration. (Basilan Estates, Inc. v. CIR, 21 SCRA 17). Such is not the case with goodwill.  ALTERNATIVE ANSWER: Depreciation of goodwill is allowed as a deduction from gross income if the goodwill is acquired through capital outlay and is known from experience to be of value to the business for only a limited period. (Section 107, Revenue Regulations No. 2). In such case, the goodwill is allowed to be amortized 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. (BAR 1999) 2. Mr. Domingo owns a vacant parcel of land. He leases the land to Mr. Enriquez for ten years at a rental of P12,000.00 per year. The condition is that Mr. Enriquez will erect a building on the land which will become the property of Mr. Domingo at the end of the lease without compensation or reimbursement whatsoever for the value of the building. Mr. Enriquez erects the building. Upon completion the building had a fair market value of PI Million. At the end of the lease the building is worth only P900.000.00 due to depreciation. Will Mr. Domingo have income when the lease expires and becomes the owner of the building with a fair market value of P900.000.00? How much income must he report on the building? Explain.  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: a) The lessor may report as income the market value of the building at the time when such building is completed; or Page | 100

b) The 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 aliquot part thereof (Sec. 49, RR No. 2). Under the first option, the lessor will have no income when the lease expires and becomes the owner of the building. The second option will give rise to an income during the year of lease expiration of P90.000.00 or 1/10 of the depreciated value of the building. The availment of the first option will require Mr. Domingo to report an income of PI,000,000.00 during the year when the building was completed. A total of P900.000.00 income will be reported under the second option but will be spread over the life of the lease or P90.000.00 per year.  ALTERNATIVE ANSWER: Mr. Domingo will realize an income when the lease expires and becomes the owner of the building with a fair market value of P900.000.00 because the condition for the lease is the transfer of the building at the expiration of the lease. The income to be realized by Mr. Domingo at the time of the expiration will consist of the value of the building which is P900.000.00 and any rental income that has accrued as of said date. (BAR 1995) a) Requisites for deductibility b) Methods of computing depreciation allowance 1. What is the proper allowance for depreciation of any property used in trade or business? (3%] What is the annual depreciation of a depreciable fixed asset with a cost of P100.000 and an estimated useful life of 20 years and salvage value of P10,000 after its useful life? [2%] SUGGESTED ANSWER: 1. The proper allowance of depreciation of any property used in trade or business refers to the reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of said property. The reasonable allowance shall Include, but not limited to, an allowance computed under any of the following methods: a) straight-line method; b) decliningbalance method; c) sum-of-years-dlgit method; and d) any other method which may be prescribed by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue (Sec. 34(F), NIRC). 2. The annual depreciation of the depreciable fixed asset may be computed on the straight-line method which will allow the taxpayer to deduct an annual depreciation of Php4,500, arrived at by dividing the depreciable value (Php 100,000-Php10,000) of Php90,000 by the estimated useful life (20 years). Note: The bar candidate may give a different figure depending on the method he used in computing the annual depreciation. The facts given in the problem are sufficient to compute the annual depreciation either under the declining-balance method or sum-of-years-digit method. Any answer arrived at by using any of the recognized methods should be given full credit. It is suggested that no question requiring computation should be given in future bar examinations. (BAR 1998) (a) Straight-line method (b) Declining-balance method (c) Sum-of-the-years-digit method (vii) Charitable and other contributions a) Requisites for deductibility Page | 101

1. In order that donations to non-stock, non-profit educational Institution may be exempt from the donor’s gift tax, what conditions must be met by the donee? (3%) SUGGESTED ANSWER: In order that donations to non-stock, non-profit educational institution may be exempt from the donor’s gift tax, it is required that not more than 30% of the said gifts shall be used by the donee-institution for administration purposes. (Sec. 101(A)(3), NIRC). (BAR 2002) b) Amount that may be deducted 1. On December 06, 2001, LVN Corporation donated a piece of vacant lot situated in Mandaduyong City to an accredited and duty registered non-stock, non-profit educational institution to be used by the latter in building a sports complex for students. May the donor claim in full as deduction from its gross income for the taxable year 2001 the amount of the donated lot equivalent to its fair market value/zonal value at the time of the donation? Explain your answer. (2%) SUGGESTED ANSWER: No. Donations and/or contributions made to qualified donee institutions consisting of property other than money shall be based on the acquisition cost of the property. The donor is not entitled to claim as full deduction the fair market value/zonal value of the lot donated. (Sec. 34(H), NIRC). (BAR 2002) Contributions to pension trusts a) Requisites for deductibility (ix) Deductions under special laws (x) Optional standard deduction a) Individuals, except non-resident aliens (viii)

1. Ernesto, a Filipino citizen and a practicing lawyer, filed his income tax return for 2007 claiming optional standard deductions. Realizing that he has enough documents to substantiate his profession-connected expenses, he now plans to file an amended income tax return for 2007, in order to claim itemized deductions, since no audit has been commenced by the BIR on the return he previously filed. Will Ernesto be allowed to amend his return? Why or why not? (4%) SUGGESTED ANSWER: No. Since Ernesto has elected to claim the optional standard deduction, said election is irrevocable for the taxable year for which the return is made (Section 34(L), NIRC). (BAR 2009) b) Corporations, except non-resident foreign corporations c) Partnerships (xi) Personal and additional exemption (R.A. No. 9504, Minimum Wage Earner Law) 1. Distinguish Allowable Deductions from Personal Exemptions. Give an example of an allowable deduction and another example for personal exemption. (5%) SUGGESTED ANSWER: The distinction between allowable deductions and personal exemptions are as follows: 1. As to amount — Allowable deductions generally refer to actual expenses incurred in the pursuit of trade, business or practice of profession while personal exemptions are arbitrary amounts allowed by law.

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2. As to nature —  Allowable deductions constitute business expenses while personal exemptions pertain to personal expenses. 3. As to purpose —  Deductions 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. 4. As to claimants — Allowable deductions can be claimed by all taxpayers, corporate or otherwise, while personal exemptions can be claimed only by individual taxpayers. (BAR 2001) a) Basic personal exemptions 1. Charlie, a widower, has two sons by his previous marriage. Charlie lives with Jane who is legally married to Mario. They have a child name Jill. The children are all minors and not gainfully employed. How much personal exemption can Charlie claim? Explain. 2.5% SUGGESTED ANSWER: Charlie can claim the personal exemption of a Head of a Family or P25,000.00 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 (Sec. 35(A)t NIRC). (BAR 2006) 2. Maria Clara, a Filipino citizen, married Ha Wa, a Hongkong national in 1988 in Hongkong. In 1989, the two separated and Maria returned to the Philippines. The two lost contact with each other. In 1990, Maria filed her income tax return and claimed a personal exemption of P12.000.00 under Sec. 21(a) of the Tax Code. Decide.  ANSWER: Maria may file a separate return as a married individual because it is impossible to file a consolidated return. However, according to Section 29 of the NIRC prior to the effectivity of R.A. 7167, husband and wife electing to compute their income tax separately shall be entitled to a personal exemption of P6.000.00 each.  ALTERNATIVE ANSWERS: a) Revenue Regulations No. 1-92. prescribing the implementing guidelines for R.A. No. 7167. provides that the new basic personal exemptions of individuals taxpayers are as follows: 1. For single individual or married individuals but Judicially decreed as legally separated with no qualified dependents - P9.000.00. 2. For married couples with both spouses employed- P9.000.00 3. For married couples with only one spouse employed - P 18,000.00. 4. For head of the family - P 12,000.00. Based on the foregoing provisions of law, Maria's claim of P 12,000.00 as personal exemption cannot be allowed. While she is married and not judicially separated, it does not appear that she has dependents to qualify her as head of the family and to entitle her to the claim of P12,000.00 personal exemption. b) Not being legally separated. Maria may claim a higher personal exemption of PI8.000.00 for married

individuals, and not merely PI2,000.00 which applies to the Head of a Family. The exemption for the Head of a Family requires that one be unmarried or legally separated, which Maria Clara is not. c) Maria may not claim the PI2,000.00 personal exemption as head of the family in accordance with

Section 29 of the NIRC as amended by RA 7167 and RA 7496. The Supreme Court ruled in the case of Umali v. Estanislao (209 SCRA446) that the increased personal exemptions shall take effect on January Page | 103

29, 1992 and shall be applied on income earned for taxable year 1991. (BAR 1993) b) Additional exemptions for taxpayer with dependents 1. Charlie, a widower, has two sons by his previous marriage. Charlie lives with Jane who is legally married to Mario. They have a child name Jill. The children are all minors and not gainfully employed. How much additional exemption can Charlie claim? Explain. 2.5% SUGGESTED ANSWER: Each legitimate children from his previous marriage and his illegitimate child with Jane entitled him to additional personal exemption of P8.000.00 for each dependent, if apart from being minor and not gainfully employed, they are unmarried, living with and dependent upon Charlie for their chief support (Sec. 35(B), NIRC). (BAR 2006) 2.  Arnold, who is single, cohabits with Vilma, who is legally married to Zachary. Arnold and Vilma have six minor children who live and depend upon Arnold for their chief support. The children are not married and not gainfully employed. 1. For income tax purposes, may Arnold be considered as “head of a family?" [3%] 2. Is Arnold entitled to deduct from his gross income, an additional exemption for each of his illegitimate child? [2%] SUGGESTED ANSWER: 1. Yes. An unmarried man who has illegitimate minor children who live with him and depend upon him for their chief suppo rt is considered as “head of the family" (RR No. 2 -98 implementing Section 35, NIRC). 2. No. Arnold is only entitled to deduct additional personal exemption for four (4) out of the six (6) illegitimate children. The maximum number of dependents for purposes of the additional personal exemption is four. (Sec. 35, NIRC). (BAR 1998) c) Status-at-the-end-of-the-year rule 1. RAM got married to LISA last January 2003. On November 30, 2003, LISA gave birth to twins. Unfortunately, however, USA died in the course of her delivery. Due to complications, one of the twins also died on December 15, 2003. In preparing his Income Tax Return (TTR) for the year 2003, what should RAM indicate in the ITR as his civil status: (a) single; (b) married; (c) Head of the family; (d) widower, (e) none of the above? Why? Reason. (5%) SUGGESTED ANSWER: RAM should indicate (b) married” as his civil status in preparing his Income Tax Return for the y ear 2003. The 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 (Section 35[C], NIRC). (BAR 2004) 2. Mar and Joy got married in 1990. A week before their marriage, Joy received, by way of donation, a condominium unit worth P750.000.00 from her parents. After marriage, some renovations were made at a cost of PI50,000.00. The spouses were both employed in 1991 by the same company. On Page | 104

30 December 1992, their first child was bom, and a second child was b om on 07 November 1993. In 1994, they sold the condominium unit and bought a new unit. Under the foregoing facts, what were the events in the life of the spouses that had income tax incidences?  ANSWER: The events in the life of spouses Mar and Joy which have income tax incidences are the following: (a) Their marriage in 1990 qualifies them to claim personal exemption for married individuals; (b) Their employment in 1991 by the same company will make them liable to the income tax imposed on gross compensation income; (c) Birth of their first child in December 1992 would give rise to an additional exemption of P5.000 for taxable year 1992; (d) Birth of their second child in November 1993 would likewise entitle them to claim additional exemption of P5, 000 raising their additional personal exemptions to P10,000 for taxable year 1993; and Sale of their condominium unit in 1994 shall make the spouses liable to the 5% capital gains tax on the gain presumed to have been realized from the sale. (BAR 1997) d) Exemptions claimed by non-resident aliens 1.  A non-resident alien who stays in the Philippines for less than 180 days during the calendar year shall be entitled to personal exemption not to exceed the amount allowed to citizens of the Philippines by the country of which he is subject or citizen. SUGGESTED ANSWER: FALSE. [Sec. 25(A)(1) in relation to Sec. 35, NIRC.) (xii) Items not deductible

a) General rules b) Personal, living or family expenses c) Amount paid for new buildings or for permanent improvements (capital expenditures) d) Amount expended in restoring property (major repairs) e) Premiums paid on life insurance policy covering life or any other officer or employee financially interested 1. Premium payment for health insurance of an individual who is an employee in an amount of P2,500 per year may be deducted from gross income if his gross salary per year is not more than P250.000. SUGGESTED ANSWER: FALSE [Sec. 34(M), NIRC.] 2. OXY is the president and chief executive officer of ADD Computers* Inc. When OXY was asked to join the government service as director of a bureau under the Department of Trade and Industry, he took a leave of absence from ADD. Believing that its business outlook, goodwill and opportunities improved with OXY in the government, ADD proposed to obtain a policy of insurance on his life. On ethical grounds, OXY objected to the insurance purchase but ADD purchased the policy anyway. Its annual premium amounted to P100, 000. Is said premium deductible by ADD Computers, Inc.? Reason. (5%) Page | 105

SUGGESTED ANSWER: No. The premium is not deductible because it is not an ord inary business expense. The term "ordinary’* is used in the income tax law in its common significance and it has the connotation of being normal, usual or customary (Deputy v. Du Pont, 308 US 488 [1940D. Paying premiums for the insurance of a person not connected to the company is not normal, usual or customary. Another reason for its non-deductibility is the fact that it can be considered as an illegal compensation made to a government employee. This is so because if the insured, his estate or heirs were made as the beneficiary (because of the requirement of insurable interest), the payment of premium will constitute bribes which are not allowed as deduction from gross income (Section 34[A][1][c], NIRC). 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 (Section 36[A][4], NIRC). (BAR 2004) f) Interest expense, bad debts, and losses from sales of property between related parties g) Losses from sales or exchange or property h) Non-deductible interest i) Non–deductible taxes j) Non-deductible losses k) Losses from wash sales of stock or securities h. Exempt corporations (1) Propriety educational institutions and hospitals (2) Government-owned or controlled corporations (3) Others 10. Taxation of resident citizens, non-resident citizens, and resident aliens a. General rule that resident citizens are taxable on income from all sources within and without the Philippines b.Non-resident citizens 1. Mr. Cortez is a non-resident alien based in Hong Kong. During the calendar year 1999, he came to the Philippines several times and stayed in the country for an aggregated period of more than 180 days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and from abroad? (5%) SUGGESTED ANSWER: Mr. Cortez being a non-resident alien individual who has stayed for an aggregated period of more than 180 days during the calendar year 1999, shall for that taxable year be deemed to be a non-resident alien doing business in the Philippines. Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. [Sec. 25 (A) (1). NIRC of 1997] Thus, he is allowed to avail of the itemized deductions including the personal and additional exemptions but subject to the rule on reciprocity on the personal exemptions. [Sec. 34 (A) to (J) and (M) in relation to Sec. 25 (A) (1), Ibid. Sec. 35 (D), Ibid.] Note: It is suggested that full credit should be given if the e xaminee’s answer only cover the first two paragraphs. (BAR 2000) Page | 106

2.  A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen. A Co. has a subsidiary in Hong Kong (HK Co.) and will assign P for an indefinite period to work full time for HK Co. P will bring his family to reside in HK and will lease out his residence in the Philippines. The salary of P will be shouldered 50% by A Co. while the other 50% plus housing, cost of living and educational allowances of P's dependents will be shouldered by HK Co. A Co.- will credit the 50% of P’s salary to P’s Philippine bank account. P will sign the contract of employment in the Philippines. P will also be receiving rental income for the lease of his Philippine residence.  Are these salaries, allowances and rentals subject to the Philippine income tax? (5%) SUGGESTED ANSWER: The salaries and allowances received by P are not subject to Philippine income tax. P qualifies as a nonresident citizen because he leaves the Philippines for employment requiring him to be physically present abroad most of the time during the taxable year. (Section 22(E), NIRC). A non-resident citizen is taxable only on income derived from Philippine sources. (Section 23, NIRC). The salaries and allowances received from being employed abroad are incomes from without because these are compensation for services rendered outside of the Philippines. (Section 42, NIRC). However, P is taxable on rental income for the lease of his Philippine residence because this is an income derived from within, the leased property being located in the Philippines. (Section 42, NIRC). (BAR 1999) c. Taxation on compensation income (1) Inclusions (i) Monetary compensation a) Regular salary/wage b) Separation pay/retirement benefit not otherwise exempt c) Bonuses, 13th month pay, and other benefits not exempt d) Director’s fees (ii) Non-monetary compensation a) Fringe benefit not subject to tax

1. X was hired by Y to watch over Y’s fishponds with a salary of Php 10,000.00. To 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 fishponds. Is the fair market value of the use of the small hut by X a "fringe benefit" that is subject to the 32% tax imposed by Section 33 of the National Internal Revenue Code? Explain your answer. (5%) SUGGESTED ANSWER: No. X is neither a managerial nor a supervisory employee. Only managerial or supervisory employees are entitled to a fringe benefit subject to the fringe benefits tax. Even assuming that he is a managerial or supervisory employee, the small hut is provided for the convenience of the employer, hence does not constitute a taxable fringe benefit. (Section 33, NIRC). (BAR 2001) 2. X is employed as a driver of a corporate lawyer and receives a monthly salary of P5,000.00 with free board and lodging with an equivalent value of P1,500.00. 1) What will be the basis of X’s income tax. 2) Will your answer in question (a) be the same if X's employer is an obstetrician? Why?  ANSWER: 1) The basis of X’s income tax would depend on whether his employer is an employee or a practising corporate lawyer. If his employer is an employee, the basis of X’s income tax is P6,500.00 equivalent to the total of the basic salary and the value of the board and lodging. This is so because the Page | 107

employer/corporate 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), X should be taxed only on P5.000.00 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 X as a condition for employment. 2) If the employer is an obstetrician who is self- employed, the basis of X’s income wi ll only be P5.000.00 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 required to be accepted by X as condition for employment. Otherwise, X would be taxed on P6.500.00. (BAR 1996) 3. Mr. Adrian is an executive of a big business corporation. Aside from his salary, his employer provides him with the following benefits: 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 benefits, if any, must Mr. Adrian report as income? Explain.  ANSWER: Mr. Adrian must report the imputed rental value of the house and limousine as income. If the rental value exceeds the personal needs of Mr. Adrian because he is expected to provide accommodation in said house for company guests or the car is used partly for business purpose, then Mr. Adrian 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. This is because the free housing and use of the limousine are given partly for the convenience and benefit of the employer (Collector vs. Henderson).  ALTERNATIVE ANSWER: Remuneration for service although not given in the form of cash constitutes compensation income. Accordingly, the value for the use of the residential house is part of his compensation income which he must report for income tax purposes. However, if the residential house given to Mr. Adrian for his free us e as an executive is also used for the benefit of the corporation/employer, such as for entertaining customers of the corporation, only 50% of the rental value or depreciation (if the house is owned by the corporation) shall form part of compensation income (RAMO 1-87). The free use of a limousine and the membership in a country dub is not part of Mr. Adrian's compensation income because they were given for the benefit of the employer and are considered to be necessary incidents for the proper performance of his duties as an executive of the corporation. The membership fee in the country club needs to be reported as income. It appears that the membership of Mr. Adrian to the country club is primarily for the benefit and convenience of the employer. This is to enable Mr. Adrian to entertain company guests (Collector vs. Henderson). (BAR 1995) 4. Capt. Canuto is a member of the Armed Forces of the Philippines. Aside from his pay as captain, the government gives him free uniforms, free living quarters in whatever military camp he is assigned, and free meals inside the camp.  Are these benefits income to Capt. Canuto? Explain.  ANSWER: No, the free uniforms, free living quarters and the free meals inside the camp are not income to Capt. Canuto because these are facilities or privileges furnished by the employer for the employer's convenience which are necessary incidents to proper performance of the military personnel's duties. (BAR 1995) 5. X is employed as security guard of Excel Supermarket, Inc. X lives in a room within the compound of Excel but he is not charged any rent. The rental value of the room is P300.00 a month. X wants Page | 108

your opinion on whether BIR can tax the value of the free use of his room.  ANSWER: The rental value of the room is not taxable. Section 2.2 of the Revenue Audit Memo Order No. 1-87 provides that if the lodging is furnished in the business premises of the employer and the employee is required to accept such lodging as a condition of his employment, then the value of said lodging will be not taxable. It is merely for the convenience, comfort and pleasure of the employer.  ALTERNATIVE ANSWER: a) The BIR may not tax the value of the free use of the room, as the same may not strictly be considered compensation income. Considering the nature of X’s employment and the fact that free lodging was furnished within the business premises, it may reasonably be said that the benefit therefrom inured to the employer more than to X and thus may not actually be considered remuneration for services included in the computation of taxable income. b) It depends. If the lodging furnished to employee-X is within the business premises of the employer

and the employee is required to accept the lodging as condition for employment the imputed rental value of the room used by X shall be excluded from X's compensation income (BIR Audit Memo 1-87). (BAR 1993) (2) Exclusions (i) Fringe benefit subject to tax (ii) De minimis benefits 1. Nutrition Chippy Corporation gives all its employees (rank and file, supervisors and managers) one sack of rice every month valued at P800 per sack. During an audit investigation made by the Bureau of Internal Revenue (BIR), the BIR assessed the company for failure to withhold the corresponding withholding tax on the amount equivalent to the one sack of rice received by all the employees, contending that the sack of rice is considered as additional compensation for the rank and file employees and additional fringe benefit for the supervisors and managers. Therefore, the value of the one sack of rice every month should be considered as part of the compensation of the rank and file subject to tax. For the supervisors and managers, the employer should be the one assessed pursuant to Section 33 (a) of the NIRC. Is there a legal basis for the assessment made by the BIR? Explain your answer. SUGGESTED ANSWER: There is no legal basis for the assessment. The one sack of rice given to the supervisors and managers are considered de minimis fringe benefits considering that the value per sack does not exceed PI,000, hence exempted from the fringe benefits tax. (Section 33, NIRC as implemented by RR No. 10-2000). The one sack of rice per month given to the rank and file employees is, likewise, not subject to tax as part of compensation income. This is a benefit of relatively small value intended to promote the health, goodwill, contentment and efficiency of the employee which will not constitute taxable income of the recipient. (Section 2.78.1(A)(3) of RR No. 2-98). (BAR 2007) 2. State with reasons the tax treatment of the following in the preparation of annual- income tax returns: De minimis benefits; SUGGESTED ANSWER: De minimis benefits are non-taxable fringe benefits. They are not to be reported in the income tax return because they are tax exempt. They are also exempt from the imposition of the fringe benefits tax. (Sec. 33(C), NIRC). (BAR 2005) Page | 109

(iii) 13th  month pay and other benefits, and payments specifically excluded from

taxable compensation income 1. State with reasons the tax treatment of the following in the preparation of annual- income tax returns: 13th month pay SUGGESTED ANSWER: 13th month pay is excluded from the gross income for income tax purposes to the extent of P30,000.00. Any excess will be included in the gross income per income tax return as part of gross compensation income. (Sec. 32(B)(7)(e), NIRC). (BAR 2005) (3) Deductions

1.  A is a travelling salesman working full time for Nu Skin Products. He receives a monthly salary plus 3% commission on his sales in a Southern province where he is based. He regularly uses his own car to maximize his visits even to far flung areas. One fine day a group of militants seized his car. He was notified the- following day by the police that the marines and the militants had a bloody encounter and his car was completely destroyed after a grenade hit it.  A wants to file a claim for casualty loss. Explain the legal basis of your tax advice. (3%) SUGGESTED ANSWER: A is not entitled to claim a casualty loss because all of his income partake the nature of compensation income. Taxpayers earning compensation income arising from personal services under an employeremployee relationship are not allowed to claim deduction except that allowed under Section 34(M) referring only to the P2,400 health and/or hospitalization insurance premium; perforce, the claim of casualty loss has no legal basis (Sec. 34, NIRC). 2. Taxpayers whose only income consist 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 net taxable income. With the passage of the Comprehensive Tax Reform Act of 1997, is this complaint still valid? Explain your answer. (5%) SUGGESTED ANSWER: No more. Gross compensation income earners are now allowed at least an item of deduction in the form of premium payments on health and/or hospitalization insurance in an amount not exceeding P2.400 per annum [Section 34(M)]. This deduction is allowed if the aggregate family income do not exceed P250.000 and by the spouse, in case of married individual, who claims additional personal exemption for dependents. (BAR 2001) (i) Personal exemptions and additional exemptions

1. Charlie, a widower, has two sons by his previous marriage. Charlie lives with Jane who is legally married to Mario. They have a child name Jill. The children are all minors and not gainfully employed. How much personal exemption can Charlie claim? Explain. 2.5% Page | 110

SUGGESTED ANSWER: Charlie can claim the personal exemption of a Head of a Family or P25,000.00 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 (Sec. 35(A)t NIRC). How much additional exemption can Charlie claim? Explain. 2.5% SUGGESTED ANSWER: Each legitimate children from his previous marriage and his illegitimate child with Jane entitled him to additional personal exemption of P8.000.00 for each dependent, if apart from being minor and not gainfully employed, they are unmarried, living with and dependent upon Charlie for their chief support (Sec. 35(B), NIRC). (BAR 2006) 2. Distinguish Allowable Deductions from Personal Exemptions. Give an example of an allowable deduction and another example for personal exemption. (5%) SUGGESTED ANSWER: The distinction between allowable deductions and personal exemptions are as follows: 1. As to amount — Allowable deductions generally refer to actual expenses incurred in the pursuit of trade, business or practice of profession while personal exemptions are arbitrary amounts allowed by law. 2. As to nature —  Allowable deductions constitute business expenses while personal exemptions pertain to personal expenses. 3. As to purpose —  Deductions 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. 4. As to claimants — Allowable deductions can be claimed by all taxpayers, corporate or otherwise, while personal exemptions can be claimed only by individual taxpayers. (BAR 2001) 3.  Arnold, who is single, cohabits with Vilma, who is legally married to Zachary. Arnold and Vilma have six minor children who live and depend upon Arnold for their chief support. The children are not married and not gainfully employed. (a) For income tax purposes, may Arnold be considered as “head of a family?" [3%] (b) Is Arnold entitled to deduct from his gross income, an additional exemption for each of his illegitimate child? [2%] SUGGESTED ANSWER: (a) Yes. An 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" (RR No. 2 -98 implementing Section 35, NIRC). (b) No. Arnold is only entitled to deduct additional personal exemption for four (4) out of the six (6) illegitimate children. The maximum number of dependents for purposes of the additional personal exemption is four. (Sec. 35, NIRC). (BAR 1998) 4. Maria Clara, a Filipino citizen, married Ha Wa, a Hongkong national in 1988 in Hongkong. In 1989, the two separated and Maria returned to the Philippines. The two lost contact with each other. In 1990, Maria filed her income tax return and claimed a personal exemption of P12.000.00 under Sec. 21(a) of the Tax Code. Decide. Page | 111

 ANSWER: Maria may file a separate return as a married individual because it is impossible to file a consolidated return. However, according to Section 29 of the NIRC prior to the effectivity of R.A. 7167, husband and wife electing to compute their income tax separately shall be entitled to a personal exemption of P6.000.00 each.  ALTERNATIVE ANSWERS: Revenue Regulations No. 1-92. prescribing the implementing guidelines for R.A. No. 7167. provides that the new basic personal exemptions of individuals taxpayers are as follows: 1. For single individual or married individuals but Judicially decreed as legally separated with no qualified dependents - P9.000.00. 2. For married couples with both spouses employed- P9.000.00 3. For married couples with only one spouse employed - P 18,000.00. 4. For head of the family - P 12,000.00. Based on the foregoing provisions of law, Maria's claim of P 12,000.00 as personal exemption cannot be allowed. While she is married and not judicially separated, it does not appear that she has dependents to qualify her as head of the family and to entitle her to the claim of P12,000.00 personal exemption. a)

Not being legally separated. Maria may claim a higher personal exemption of PI8.000.00 for married individuals, and not merely PI2,000.00 which applies to the Head of a Family. The exemption for the Head of a Family requires that one be unmarried or legally separated, which Maria Clara is not.

b)

Maria may not claim the PI2,000.00 personal exemption as head of the family in accordance with Section 29 of the NIRC as amended by RA 7167 and RA 7496. The Supreme Court ruled in the case of Umali v. Estanislao (209 SCRA446) that the increased personal exemptions shall take effect on January 29, 1992 and shall be applied on income earned for taxable year 1991. (BAR 1993) (ii) Health and hospitalization insurance (iii) Taxation of compensation income of a minimum wage earner

a) Definition of statutory minimum wage b) Definition of minimum wage earner c) Income also subject to tax exemption: holiday pay, overtime pay, night-shift differential, and hazard pay d.Taxation of business income/income from practice of profession e. Taxation of passive income (1) Passive income subject to final tax (i) Interest income 1. In 2007, spouses Renato and Judy Garcia opened peso and dollar deposits at the Philippine branch of the Hong Kong Bank in Manila. Renato is an overseas worker in Hong Kong while Judy lives and works in Manila. During the year, the bank paid interest income of P10,000 on the peso deposit and US$ 1,000 on the dollar deposit. The bank withheld final income tax equivalent to 20% of the entire income and remitted the same to the BIR. a) Are the interest incomes on the bank deposits of spouses Renato and Judy Garcia subject to income tax? Explain. (4%) SUGGESTED ANSWER: a) Yes. The Interest income from the peso bank deposit is subject to 20% final withholding tax. The interest income from the dollar deposit is subject to 7.5% final withholding tax but only on the portion Page | 112

of the interest attributable to Judy or $500. The interest on the dollar deposit attributable to Renato, a non-resident, is exempt from income tax. (Section 24(B)(1), NIRC). b) Is the bank correct in withholding the 20% final tax on the entire interest income? Explain. (3%) SUGGESTED ANSWER: b) No. Only the interest income on a peso deposit is subject to 20%. The interest income from a dollar deposit is subject to 7.5% if the earner is a resident individual. (Section 24(B), NIRC). (BAR 2008) 2. State with reasons the tax treatment of the following in the preparation of annual- income tax returns: Interest on deposits with (i) BPI Family Bank; and (ii) a local offshore banking unit of a foreign bank; SUGGESTED ANSWER: Interest on deposit with BPI Family Bank is a passive income subject to a final withholding tax rate of 20%; the interest on deposit with a local offshore banking unit of a foreign bank is a passive income subject to a final withholding tax rate of 7.5%. (Sec. 24(B)(1), NIRC). Both interest incomes are not to be declared as part of gross income in the income tax return. (BAR 2005) a) Treatment of income from long-term deposits (ii) Royalties (iii) Dividends from domestic corporations 1. On 03 January 1998, X, a Filipino citizen residing in the Philippines, purchased one hundred (100) shares in the capital stock of Y Corporation, a domestic company. On 03 January 2000, Y Corporation declared, out of the profits of the company earned after 01 January 1998, a hundred percent (100%) stock dividends on all stockholders of record as of 31 December 1999 as a result of which X holding in Y Corporation became two hundred (200) shares.  Are the stock dividends received by X subject to income tax? Explain. SUGGESTED ANSWER: No. Stock dividends are not realized income. Accordingly, the different provisions of the Tax Code imposing a tax on dividend income only includes within its purview cash and property dividends making stock dividends exempt from income tax. However, if the distribution of stock dividends is the equivalent of cash or property, as when the distribution results in a change of ownership interest of the shareholders, the stock dividends will be subject to income tax. (Section 24(B)(2); Section 25(A)&(B); Section 28(B)(5)(b), 1997 Tax Code) (BAR 2003) 2. During the year, a domestic corporation derived the following items of revenue: (a) gross receipts from a trading business: (b) interests from money placements in the banks; (c) dividends from its stock investments in domestic corporations; (d) gains from stock transactions through the Philippine Stock Exchange; (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?  ANSWER: The gross receipts from trading business is includible as an item of income in the corporate income tax return and subject to corporate income tax rate based on net income. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a Page | 113

final withholding tax of 20%; dividends from domestic corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. The 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.  ALTERNATIVE ANSWER: The gross receipts from trading business are includible as an item of income in the corporate income tax return. Likewise, the gain or loss realized as a consequence of the receipt of proceeds under an insurance policy on the loss of goods will be included in the corporate income tax return either as a taxable gain or a deductible loss. The gain or loss is arrived at by deducting from the proceeds of insurance (amount realized) the basis of the good lost (Sec. 34(a). NIRC). The net income of the corporation shall be subject to corporate income tax rate of 35%. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20%; dividends from Domestic Corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. (BAR 1997) (iv) Prizes and other winnings

1. Informer’s reward is subject to a final withholding tax of 10%. SUGGESTED ANSWER: TRUE. [Sec. 282, NIRC.} 2. Mr. Castro inherited from his father, who died on June 10,1994, several pieces of real property in Metro Manila. The estate tax return was filed and the estate tax due in the amount of P250,000.00 was paid on December 06, 1994. The Tax Fraud Division of the BIR investigated the case on the basis of confidential information given by Mr. Santos on January 06, 1998 that the return filed by Mr. Castro was fraudulent and that he failed to declare all properties left by his father with intent to evade payment of the correct tax. As a result, a deficiency estate tax assessment for P1,250,000.00, inclusive of 50% surcharge for fraud, interest and penalty, was issued against him on January 10, 2001. Mr. Castro protested the assessment on the ground of prescription. What legal requirement/s must Mr. Santos comply with so that he can claim his reward? Explain. (3%) SUGGESTED ANSWER: The legal requirements that must be complied by Mr. Santos to entitle him to reward are as follows: 1. He should voluntarily file a confidential information under oath with the Law Division of the Bureau of Internal Revenue alleging therein the specific violations constituting fraud; 2. The information must not yet be in the possession of the Bureau of Internal Revenue, or refer to a case already pending or previously investigated by the Bureau of Internal Revenue; 3. Mr. Santos should not be a government employee or a relative of a government employee within the sixth degree of consanguinity; and 4. The information must result to collections of revenues and/or fines and penalties. (Sec. 282, NIRC) (BAR 2002)

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3. Jose Miranda, a young artist and designer, received a prize of P100.000.00 for winning in the onthe-spot peace poster contest sponsored by a local Lions Club. Shall the reward be included in the gross income of the recipient for tax purposes? Explain. (3%) SUGGESTED ANSWER: No. It is not includable in the gross income of the recipient because the same is subject to a final tax of 20%, the amount thereof being in excess of P10.000 (Sec. 24(B)(1), NIRC of 1997). The prize 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. [Sec. 32 (B) (7) (c), NIRC of 1997] Since it is an on-the-spot contest, it is evident that he must have joined the contest in order to earn the prize or award. (BAR 2000) 4. Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council, a sports association duly accredited by the Philippine Boxing Association. Onyoc received the amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to collect income tax on the amount received by Onyoc and donor’s tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.  ANSWER: The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the income tax. RA. No. 7549 explicitly provides that “All prizes and awards granted to athletes in local and International sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax". Neither is the BIR correct in collecting the donor’s tax from Ayala Land Corporation. The law is clear when it categorically stated “That the donor’s of said prizes and awards shall be exempt from the payment of the donor’s tax." (BAR 1996)

(2) Passive income not subject to final tax f. Taxation of capital gains (1) Income from sale of shares of stock of a Philippine corporation (i) Shares traded and listed in the stock exchange 1. John McDonald, a U.S. citizen residing in Makati City, bought shares of stock of a domestic corporation whose shares are listed and traded in the Philippines Stock Exchange at the price of P2 million. Yesterday, he sold the shares of stock through his favorite Makati stockbroker at a gain of P200,000. a) Is John McDonald subject to Philippine income tax on the sale of his shares through his stockbroker? Is he liable for any other tax? Explain. (3%) SUGGESTED ANSWER: a) No. The gain on the sale or disposition of shares of stock of a domestic corporation held as capital assets will not be subject to income tax if these shares sold are listed and traded in the s tock exchange. (Section 24(C), NIRC). However, the seller is subject to the percentage tax of 1/2 of 1% of the gross selling price. (Section 127 (A), NIRC). (BAR 2008) (ii) Shares not listed and traded in the stock exchange

1. John McDonald, a U.S. citizen residing in Makati City, bought shares of stock of a domestic corporation whose shares are listed and traded in the Philippines Stock Exchange at the price of P2 million. Yesterday, he sold the shares of stock through his favorite Makati stockbroker at a gain of P200,000.

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b) If John McDonald directly sold the shares to his best friend, who is another U.S. citizen residing in Makati, at a gain of P200,000, is he liable for Philippine income tax? If so, what is the tax base and rate? Explain. (3%) SUGGESTED ANSWERS: b) Yes. The sale of shares of stocks of a domestic corporation held as capital asset, not through a trading in the local stock exchange, is subject to capital gains tax based on the net capital gain during the taxable year. The tax rate is 5% for a net capital gain not exceeding P100,000 and 10% for any excess. (Section 24(C), NIRC). (BAR 2008) (2) Income from the sale of real property situated in the Philippines

1. Melissa inherited from her father a 300-square- meter lot. At the time of her father’s death on March 14, 1995, the property was valued at P720,000.00. On February 28, 1996, to defray the cost of the medical expenses of her sick son, she sold the lot for P600.000.00, on cash basis. The prevailing market value of the property at the time of the sale was P3.000.00 per square meter. Is Melissa liable to pay capital gains tax on the transaction? If so, how much and why? If not, why not? (4%) SUGGESTED ANSWER: Yes. The capital gains tax is 6% of the higher value between the selling price (P600,000.00) and fair market value of the real property (P900,000.00) or a tax in the amount of P54,000.00. The capital gains tax is due on the sale of a real property classified as a capital asset (Section 24(D)(1), NIRC). (BAR 2009) 2. Josel agreed to sell his condominium unit to Jess for P2. 5 Million. At the time of the sale, the property had a zonal value of P2.0 Million. Upon the advice of a tax consultant, the parties agreed to execute two deeds of sale, one indicating the zonal value of P2.0 Million as the selling price and the other showing the true selling price of P2.5 Million. The tax consultant filed the capital gains tax return using the deed of sale showing the zonal value of' P2.0 Million as the selling price. Discuss the tax implications and consequences of the action taken by the parties. (5%) SUGGESTED ANSWER: The capital gains tax due on the sale shall be based on the actual selling price of P2.5 million which is higher than the zonal value of the property. (Section 24(D)(1), NIRC). The documentary stamp tax on the conveyance of real property shall likewise be based on the higher value. (Sec. 196, NIRC). Accordingly, a deficiency capital gains tax and documentary stamp tax are due from Josel plus the 50% surcharge imposable on a fraudulent return. Both Josel and his tax consultant are criminally liable for tax evasion. Here, it is clear that the three requisite factors to constitute tax evasion are present, viz: (1) the end to be achieved which is the payment of less than that known by them to be legally due; (2) an accompanying state of mind which is evil, in bad faith, willfull or deliberate and not merely accidental; and (3) a course of action which is unlawful. [CIR v. Estate of Benigno P. Toda, Jr., 438 SCRA 290 (2004)]. (BAR 2005) 3.  A, a doctor by profession sold in the year 2000 a parcel of land which he bought as a form of investment in 1990 for Php 1 million. The land was sold to B, his colleague, at a time when the real estate prices had gone down and so the land was sold only for Php 800,000 which was then the fair market value of the land. He used the proceeds to finance his trip to the United States. He claims that he should not be made to pay the 6% final tax because he did not have any actual gain on the sale. Is his contention correct? Why? (5%) Page | 116

SUGGESTED ANSWER: No. The 6% capital gains tax on sale of a real property held as capital asset is imposed on the income presumed to have been realized from the sale which is the fair market value or selling price thereof, whichever is higher. (Section 24(D), NIRC). Actual gain is not required for the imposition of the tax but it is the gain by fiction of law which is taxable. (BAR 2001) 4. Juan Panalo won a damage suit for P500,000.00 against Juana Talo. Panalo got a writ of execution and made a levy on the lot of Talo. The lot was sold at public auction where Panalo was the highest bidder for P500.000.00. Panalo refused to pay any capital gains tax on his purchase of said lot. Your opinion.  ANSWER: The capital gains tax from sales of real property is payable by the seller (Section 21 (e) in relation to Section 49 (a) (4) of the NIRC). Hence, Panalo cannot refuse to pay the capital gains tax on his purchase of said lot.  ALTERNATIVE ANSWER: Panalo is not liable for capital gains tax as only the vendor, in this case, Talo, is liable therefor, if at all. (BAR 1993) 5. Z is a Filipino immigrant living in the United States for more than 10 years. He is retired and he came back to the Philippines as a balikbayan. Every time he c omes to the Philippines, he stays here for about a month. He regularly receives a pension from his former employer in the United States, amounting to US$1,000 a month. While in the Philippines, with his pension pay from his former employer, he purchased three condominium units in Makati which he is renting out for P15,000 a month each. Is his purchase of the three condominium units subject to any tax? Reason briefly. SUGGESTED ANSWER: Yes. The purchase will be subject to the capital tax imposed on the sale of real property and the documentary stamp tax on conveyance of real property, if these units are acquired from individual unit owners or domestic corporations who hold them as capital assets. (Section 24(D), 27(D)(5) and 196, NIRC). If these properties, however, were acquired from dealers and/or lessors of real property the purchase will give rise to the imposition of the regular income tax, value-added tax and documentary stamp tax. (Section 24-28 and 196, NIRC).  ALTERNATIVE ANSWER: Yes, the purchase of the three condominium units is subject to the following taxes: i. ii. iii. iv.

capital gains tax, if held as capital assets by the seller (Section 24(D) and 27(D)(5), NIRC), otherwise, the regular income tax (Section 24-28, NIRC); documentary stamp tax (Section 196, NIRC); local transfer tax (Section 135, LGC); and value-added tax if acquired from real estate developers or lessors of real property.

 ALTERNATIVE ANSWER: The purchase is only subject to the documentary stamp tax, a tax that is imposed indifferently on the parties to a transaction (Section 173 and 196, NIRC). Other taxes that may be due on the transaction, other than the documentary stamp tax, are the legal liabilities of the seller which cannot be considered as a tax on the purchase but a tax on the sale. To the purchaser, these taxes are not taxes but merely part of the purchase price if, by the nature of the tax, the economic incidence can be shifted to him. (BAR 2007) Page | 117

(3) Income from the sale, exchange, or other disposition of other capital assets 1. Pedro Manalo, a Filipino citizen residing in Makati City, owns a vacation house and lot in San Francisco, California, U.S.A, which he acquired in 2000 for P15 million. On January 10, 2006, he sold said real property to Juan Mayaman, another Filipino citizen residing in Quezon City, for P20 million. On February 9,2006, Manalo filed the capital gains tax return and paid PI.2 million representing 6% capital gains tax. Since Manalo did not derive any ordinary income, no income tax return was filed by him for 2006." After the tax audit conducted in 2007, the BIR officer assessed Manalo for deficiency income tax computed as follows: P5 million (P20 million less PI5 million) x 35% = PI.75 million, without the capital gains tax paid being allowed as tax credit. Manalo consulted a real estate broker who said that the PI.2 million capital gains tax should be credited from the PI.75 million deficiency income tax. a) Is the BIR officer’s tax assessment correct? Explain. SUGGESTED ANSWER: The BIR officer’s tax assessment is wrong for two reasons. First, the rate of i ncome tax used is the corporate income tax although the taxpayer is an Individual. Second, the computation of the gain recognized from the sale did not consider the holding period of the asset. The capital asset having been held for more than twelve months, only 50% of the gain is recognized. (Section 39(B), NIRC). b) If you were hired by Manalo as his tax consultant, what advice would you give him to protect his interest? Explain. (3%) SUGGESTED ANSWERS: I will advise him to ask for the Issuance of the final assessment notice and request for the crediting of the capital gains tax paid against the income tax due. The taxpayer should explain that the capital gains tax was paid in good faith because the property sold is a capital asset, and considering that what was paid is also an income tax it should be credited on grounds of equity against the income tax assessment. Once the final assessment is made, 1 will advise him to protest it within thirty days from receipt, invoking the holding period and the wrong rate used. (BAR 2008) 2.  A corporation, engaged in real estate development, executed deeds of sale on various subdivided lots. One buyer, after going around the subdivision, bought a comer lot with a good view of the surrounding terrain. He paid PI .2 million, and the title to the property was issued. A year later, the value of the lot appreciated to a market value of PI.6 million, and the buyer decided to build his house thereon. Upon inspection, however, he discovered that a huge tower antennae had been erected on the lot frontage totally blocking his view. When he complained, the realty company exchanged his lot with another comer lot with an equal area but affording a better view. Is the buyer liable for capital gains tax on the exchange of the lots?  ANSWER: Yes, the buyer is subject to capital gains tax on the exchange of lots on the basis of prevailing fair market value of the property transferred at the time of the exchange or the fair market value of the property received, whichever is higher (Section 21(e), NIRC). Real property transactions subject to capital gains tax are not limited to sales but also exchanges of property unless exempted by a specific provision of law.  ALTERNATIVE ANSWER: No. The exchange is not subject 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 acquisition of a property with a good view. Page | 118

This is a simple substitution of the object of sale and since the previous transaction was already subjected to tax, no new tax should be imposed on the exchange (BIR Ruling No. 21(e) 053-89 008-95). (BAR 1997) 3.  A corporation, engaged in real estate development, executed deeds of sale on various subdivided lots. One buyer, after going around the subdivision, bought a comer lot with a good view of the surrounding terrain. He paid PI .2 million, and the title to the property was issued. A year later, the value of the lot appreciated to a market value of PI.6 million, and the buyer decided to build his house thereon. Upon inspection, however, he discovered that a huge tower antennae had been erected on the lot frontage totally blocking his view. When he complained, the realty company exchanged his lot with another comer lot with an equal area but affording a better view. Is the buyer liable for capital gains tax on the exchange of the lots?  ANSWER: Yes, the buyer is subject to capital gains tax on the exchange of lots on the basis of prevailing fair market value of the property transferred at the time of the exchange or the fair market value of the property received, whichever is higher (Section 21(e), NIRC). Real property transactions subject to capital gains tax are not limited to sales but also exchanges of property unless exempted by a specific provision of law.  ALTERNATIVE ANSWER: No. The exchange is not subject 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 acquisition of a property with a good view. This is a simple substitution of the object of sale and since the previous transaction was already subjected to tax, no new tax should be imposed on the exchange (BIR Ruling No. 21(e) 053-89 008-95). (BAR 1997) 4.  An individual taxpayer, who owns a ten (10) door apartment with a monthly rental of PI0.000 each residential unit, sold this property to another individual taxpayer. Is the seller liable to pay the capital gains tax? (5%) SUGGESTED ANSWER: No. The 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 (10) door apartment. (BAR 1998) 11. Taxation of non-resident aliens engaged in trade or business

a. General rules 1. Mr. Cortez is a non-resident alien based in Hong Kong. During the calendar year 1999, he came to the Philippines several times and stayed in the country for an aggregated period of more than 180 days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and from abroad? (5%) SUGGESTED ANSWER: Mr. Cortez being a non-resident alien individual who has stayed for an aggregated period of more than 180 days during the calendar year 1999, shall for that taxable year be deemed to be a non-resident alien doing business in the Philippines. Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. [Sec. 25 (A) (1). NIRC of 1997]

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Thus, he is allowed to avail of the itemized deductions including the personal and additional exemptions but subject to the rule on reciprocity on the personal exemptions. [Sec. 34 (A) to (J) and (M) in relation to Sec. 25 (A) (1), Ibid. Sec. 35 (D), Ibid.] Note: It is suggested that full credit should be given if the examinee’s answer only cover® the first two paragraphs. (BAR 2000) 2. Four Catholic parishes hired the services of Frank Binatra, a foreign non-resident entertainer, to perform for four (4) nights at the Folk Arts Theater. Binatra was paid P200.000.00 a night. The parishes earned PI,000,000.00 which they used for the support of the orphans in the city. Who are liable to pay taxes?  ANSWER: The following are liable to pay Income taxes: The four catholic parishes because the income received by them, not being income earned “as s uch” in the performance of their religious functions and duties, is taxable income under the last paragraph of Sec. 26, in relation to Sec. 26(e) of the Tax Code. In promoting and operating the Binatra Show, they engaged in an activity conducted for profit. (Ibid.)

The income of Frank Binatra, a non-resident alien under our law is taxable at the rate of 30%, final withholding tax based on the gross income from the show. Mr. Binatra is not engaged in any trade or business in the Philippines. (BAR 1994) b.Cash and/or property dividends c. Capital gains Exclude: non-resident aliens not engaged in trade or business 12. Individual taxpayers exempt from income tax

a. Senior citizens b.Minimum wage earners c. Exemptions granted under international agreements 13. Taxation of domestic corporations a. Tax payable (1) Regular tax 1. The Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, issued a Revenue Regulation using gross Income as the tax base for corporations doing business in the Philippines. Is the Revenue Regulation valid?  ANSWER: The regulation establishing gross income as the tax base for corporations doing business in the Philippines (domestic as well as resident foreign) is not valid. This 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. (See 1 Cooley 176-184). Certainly, 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. (BAR 1994) 2.  ABC, a domestic corporation sold in 1989 two (2) condominiun units of Legaspi Towers in Roxas Blvd. for P8,158,142.00. Taxpayer corporation declared in its income tax return for taxable year 1989, its gains derived from the sale of the two (2) condominium units as follows: Page | 120

Proceeds from sale LESS: a)  AcquisitionCosts (Deed of Sale 9/9/83) b) Payments ofRealty Tax Total (a) (b) Gains

UNIT A (316.5 sq.ft.) P3,933,679 +

UNIT B (322 sq.ft.) P4,224,463= P8.158,142

PI,501,295

+

PI,529,755 = P3,031,050

P49.248 PI.550,543 P2.383.136

+ + +

P55.413 = P104.661 PI,585,168 = P3,135,711 P2,639,295 =P5.022.431

Without going into computations, answer the following question: Since ABC derived gains from the sale of the condominium units, should it pay the 5% capital gains tax, 35% corporate income tax or none of the above because the corporation is not a real estate dealer? Discuss.  ANSWER: ABC Corporation must pay the 35% corporate income tax. The National Internal Revenue Code does not provide for the payment by corporations of 5% capital gains tax on the sale of real property, whether considered capital assets or not. Such income is included in the computation of net income (Gross taxable income less deductions) and is subject to the tax rate of 35%.  ALTERNATIVE ANSWER: The capital gains derived will only form part of the taxable income of the taxpayer susceptible to deductions. Accordingly, the net capital gain on the sale may not necessarily be subject to the 35% tax. The taxpayer’s total income and deductions for the year must be considered. It is immaterial whether the corporation is a real estate dealer or not. (BAR 1992) (2) Minimum Corporate Income Tax (MCIT) (i) Imposition of MCIT 1. What is the rationale of the law in imposing what is known as the Minimum Corporate Income tax on Domestic Corporations? (3%) SUGGESTED ANSWER: The imposition of the Minimum Corporate Income Tax (MCIT) is designed to forestall the prevailing practice of corporations of over claiming deductions in order to reduce their income tax payments. The filing of income tax returns showing a tax loss every year goes against the business motive which impelled the stockholders to form the corporation. This 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 MCIT whenever this tax imposed at 2% of gross income exceeds the normal corporate Income tax imposed on net income. (Sponsorship Speech, Chairman of Senate Ways and Means Committee). (BAR 2001) (ii) Carry forward of excess minimum tax (iii) Relief from the MCIT under certain conditions (iv) Corporations exempt from the MCIT

1. Is a corporation which is exempted from the minimum corporate income tax automatically exempted from the regular corporate income tax? Explain your answer. (2%) SUGGESTED ANSWER: Page | 121

No. The minimum corporate income tax is a proxy for the normal corporate income tax, not the regular corporate income tax paid by a corporation. For instance, a proprietary educational institution may be subject to a regular corporate income tax of 10% (depending on its dominant income), but it is exempt from the imposition of MCIT because the latter is not intended to substitute special tax rates. So is with PEZA enterprises, CDA enterprises etc. Note: If what is meant by regular income tax is the 32% tax rate imposed on taxable income of corporations, the answer would be in the affirmative, because domestic corporations and resident foreign corporations are either liable for the 2% of gross income (MCIT) or 32% of net income (the normal corporate income tax) whichever is higher.  ALTERNATIVE ANSWER: No. A corporation which is exempted from the minimum corporate income tax is not automatically exempted from the regular corporate income tax. The reason for this is that MCIT is imposed only beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations. Thus, a corporation may be exempt from MCIT because it is only on its third year of operations following its commencement of business operations. (BAR 2001) (v) Applicability of the MCIT where a corporation is governed both under the regular

tax system and a special income tax system b.Allowable deductions 1. Distinguish Allowable Deductions from Personal Exemptions. Give an example of an allowable deduction and another example for personal exemption. (5%) SUGGESTED ANSWER: The distinction between allowable deductions and personal exemptions are as follows: 1. As to amount — Allowable deductions generally refer to actual expenses incurred in the pursuit of trade, business or practice of profession while personal exemptions are arbitrary amounts allowed by law. 2. As to nature —  Allowable deductions constitute business expenses while personal exemptions pertain to personal expenses. 3. As to purpose —  Deductions 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. 4. As to claimants — Allowable deductions can be claimed by all taxpayers, corporate or otherwise, while personal exemptions can be claimed only by individual taxpayers. (BAR 2001) (i) Itemized deductions (ii) Optional standard deduction

1.  A corporation can claim the optional standard deduction equivalent to 40% of its gross sales or receipts, as the case may be. SUGGESTED ANSWER: FALSE [Sec. 34(L), NIRC, as amended by RA No. 9504.] 2. Ernesto, a Filipino citizen and a practicing lawyer, filed his income tax return for 2007 claiming optional standard deductions. Realizing that he has enough documents to substantiate his profession-connected expenses, he now plans to file an amended income tax return for 2007, in Page | 122

order to claim itemized deductions, since no audit has been commenced by the BIR on the return he previously filed. Will Ernesto be allowed to amend his return? Why or why not? (4%) SUGGESTED ANSWER: No. Since Ernesto has elected to claim the optional standard deduction, said election is irrevocable for the taxable year for which the return is made (Section 34(L), NIRC). (BAR 2009) c. Taxation of passive income (i) Passive income subject to tax a) Interest from deposits and yield, or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties 1. During the year, a domestic corporation derived the following items of revenue: (a) gross receipts from a trading business: (b) interests from money placements in the banks; (c) dividends from its stock investments in domestic corporations; (d) gains from stock transactions through the Philippine Stock Exchange; (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?  ANSWER: The gross receipts from trading business is includible as an item of income in the corporate income tax return and subject to corporate income tax rate based on net income. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20%; dividends from Domestic Corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. The 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.  ALTERNATIVE ANSWER: The gross receipts from trading business are includible as an item of income in the corporate income tax return. Likewise, the gain or loss realized as a consequence of the receipt of proceeds under an insurance policy on the loss of goods will be included in the corporate income tax return either as a taxable gain or a deductible loss. The gain or loss is arrived at by deducting from the proceeds of insurance (amount realized) the basis of the good lost (Sec. 34(a). NIRC). The net income of the corporation shall be subject to corporate income tax rate of 35%. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20%; dividends from Domestic Corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. (BAR 1997) b) Capital gains from the sale of shares of stock not traded in the stock exchange c) Income derived under the expanded foreign currency deposit system d) Inter-corporate dividends 1. State with reasons the tax treatment of the following in the preparation of annual- income tax returns: Dividends received by a domestic corporation from another domestic corporation; SUGGESTED ANSWER: Page | 123

Dividends received by a domestic corporation from another domestic corporation are not subject to income tax hence should not be declared in the income tax return. (Sec. 27 (D)(4), NIRC). (BAR 2005) 2. During the year, a domestic corporation derived the following items of revenue: (a) gross receipts from a trading business: (b) interests from money placements in the banks; (c) dividends from its stock investments in domestic corporations; (d) gains from stock transactions through the Philippine Stock Exchange; (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?  ANSWER: The gross receipts from trading business is includible as an item of income in the corporate income tax return and subject to corporate income tax rate based on net income. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20%; dividends from domestic corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. The 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.  ALTERNATIVE ANSWER: The gross receipts from trading business are includible as an item of income in the corporate income tax return. Likewise, the gain or loss realized as a consequence of the receipt of proceeds under an insurance policy on the loss of goods will be included in the corporate income tax return either as a taxable gain or a deductible loss. The gain or loss is arrived at by deducting from the proceeds of insurance (amount realized) the basis of the good lost (Sec. 34(a). NIRC). The net income of the corporation shall be subject to corporate income tax rate of 35%. The other items of revenue will not be included in the corporate income tax return. The interest from money market placements is subject to a final withholding tax of 20%; dividends from Domestic Corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the income tax. (BAR 1997) e) Capital gains realized from the sale, exchange, or disposition of lands and/or buildings 1. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for PI00,000. This property has a current fair market value of P10 million in view of the construction of a concrete road traversing the property. Juan Gonzales agreed to exchange his agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a fair market value of P10 million, owned by Alpha Corporation, a domestic corporation engaged in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for P9 million. b) Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain. (3%) SUGGESTED ANSWER: b) Yes. The tax base in a taxable disposition of a real property classified as a capital asset is the higher between two values: the fair market value of the property received in exchange and the fair market value of the property exchanged. Since the fair market value of two properties are the same, the said fair market value should be taken as the tax base which is P10 million. The income tax rate is 6%. (Section 24(D) (1), NIRC). (BAR 2008)

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2.  An individual taxpayer who owns a ten (10) door apartment with a monthly rental of PI0.000 each residential unit, sold this property to another individual taxpayer. Is the seller liable to pay the capital gains tax? (5%) SUGGESTED ANSWER: No. The 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 (10) door apartment. (BAR 1998)

(ii) Passive income not subject to tax

d.Taxation of capital gains (i) Income from sale of shares of stock (ii) Income from the sale of real property situated in the Philippines 1.  ABC Corporation sold a real property in Malolos, Bulacan to XYZ Corporation. The property has been classified as residential and with a zonal valuation of PI,000 per square meter. The capital gains tax was paid based on the zonal value. The Revenue District Officer (RDO), however, refused to issue the Certificate Authorizing Registration for the reason that based on his ocular inspection the property should have a higher zonal valuation determined by the Commissioner of Internal Revenue because the area is already a commercial area. Accordingly, the RDO wanted to make a recomputation of the taxes due by using the fair market value appearing in a nearby bank’s valuation list which is practically double the existing zonal value. The RDO also wanted to assess a donor’s tax on the difference between the selling price based on the zonal value and the fair market value appearing in a nearby bank’s valuation list. Does the RDO have the authority or discretion to unilaterally use the fair market value as the basis for determining the capital gains tax and not the zonal value as determined by the Commissioner of Internal Revenue? Reason briefly. SUGGESTED ANSWER: No. The RDO has no authority to use a fair market value other than that prescribed in the Tax Code. The fair market value prescribed for the computation of any internal revenue tax shall be, whichever is the higher of: (1) the fair market value as determined by the Commissioner (referred to as zonal value); or (2) the fair market value as shown in the schedule of values of the provincial and city assessors (FMV per tax declaration). (Section 6(B), NIRC). The use of the fair market value app earing in a nearby bank’ s valuation list, therefor, is not allowed for purposes of computing internal revenue taxes. (BAR 2007) 2. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for PI00,000. This property has a current fair market value of P10 million in view of the construction of a concrete road traversing the property. Juan Gonzales agreed to exchange his agricultural lot in Laguna for a one-half hectare residential property located in Batangas, with a fair market value of P10 million, owned by Alpha Corporation, a domestic corporation engaged in the purchase and sale of real property. Alpha Corporation acquired the property in 2007 for P9 million. b) Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax base and rate? Explain. (3%) SUGGESTED ANSWER: b) Yes. The tax base in a taxable disposition of a real property classified as a capital asset is the higher between two values: the fair market value of the property received in exchange and the fair market value of the property exchanged. Since the fair market value of two properties are the same, the said Page | 125

fair market value should be taken as the tax base which is P10 million. The income tax rate is 6%. (Section 24(D) (1), NIRC). (BAR 2008) (iii) Income from the sale, exchange, or other disposition of other capital assets (iv) Tax on proprietary educational institutions and hospitals

1. XYZ Colleges is an educational institution run by the Archdiocese of BP City. It collected and received the following: (a) Tuition fees (b) Dormitory fees (c) Rentals from canteen concessionaires (d) Interest from money-market (e) Donation of a lot and building by school alumni

Suppose that XYZ Colleges is a proprietary educational institution owned by the Archbishop’s family, rather than the Archdiocese, which of those above cited income and donation would be exempt from taxation? Explain briefly. (5%)

SUGGESTED ANSWER: If XYZ Colleges is a proprietary educational institution, all of its income from school related and nonschool related activities will be subject to the income tax based on its aggregate net income derived from both activities (Section 27(B)). Accordingly, all of the income enumerated in the problem will be taxable. The donation of lot and building wil l likewise be subject to the donor’s tax because a donation to an educational institution is exempt only if the school is incorporated as a non-stock entity paying no dividends. Since the donee is a proprietary educational institution, the donation is taxable (Section 101(A)(3), NIRC) (BAR 2004) e. Tax on government-owned or controlled corporations, agencies or instrumentalities 14. Taxation of resident foreign corporations a. General rule b.With respect to their income from sources within the Philippines c. Minimum Corporate Income Tax d.Tax on certain income (1) Interest from deposits and yield, or any other monetary benefit from deposit substitutes, trust funds and similar arrangements and royalties (2) Income derived under the expanded foreign currency deposit system (3) Capital gains from sale of shares of stock not traded in the stock exchange (4) Inter-corporate dividends Exclude: (i) International carrier 1.  An international airline with no landing rights in the Philippines sold tickets in the Philippines for air transportation. Is income derived from such sales of tickets considered taxable income of the said international air carrier from Philippine sources under the Tax Code? Explain. (5%) SUGGESTED ANSWER: No. While the tickets are sold here by the international airline, this is for carriage of persons, excess baggage, cargo and mail not originating from the Philippines because the airline has no landing rights in Page | 126

the Philippines. The income from the sale of tickets is actually the gross revenue derived from the carriage of persons, excess baggage, cargo and mail and these revenues are considered as income from Philippine sources only if the flight originates from the Philippines in a continuous and uninterrupted flight, irrespective of the place of payment of the ticket or passage document. (Sec. 28(A)(3)(a), NIRC). Accordingly, the income mentioned is not derived from Philippine sources. (BAR 2005) (ii) Offshore banking units (iii) Branch profits remittances (iv) Regional or area headquarters and regional operating headquarters of multinational companies 15. Taxation of non-resident foreign corporations

a. General rule b.Tax on certain income (1) Interest on foreign loans (2) Inter-corporate dividends (3) Capital gains from sale of shares of stock not traded in the stock exchange Exclude: (i) Non-resident cinematographic film-owner, lessor or distributor (ii) Non-resident owner or lessor of vessels chartered by Philippine national (iii) Non-resident owner or lessor of aircraft machineries and other equipment 16. Improperly accumulated earnings of corporations

1. What is the “immediacy test”? Explain briefly. (2%) SUGGESTED ANSWER: The “immediacy test” is applied to determine whether the ac cumulation of the tax profits by a domestic or resident foreign corporation is really for the reasonable needs of the business. Under this test, the reasonable needs of the business, including reasonably anticipated needs. The corporation should be able to prove an immediate need for the accumulation of earnings and profits, or the direct correlation of anticipated needs to such accumulation of profits to justify the said accumulation. (Sec. 3, RR No. 2-2001; Mertens, Law of Federal Income Taxation, Vol 7, Chapter 39, p. 103, cited in Manila Wine Merchants, Inc. v. CIR, GR No. L-26145, Feb. 20, 1984). 2. The capitalization rules may be resorted to by the BIR in order to compel corporate taxpayers to declare dividends to their stockholders regularly. SUGGESTED ANSWER: TRUE. [Sec. 244, NIRC; Rev. Reg. No. 2-2001 implementing Sec. 29, NIRC.] 17. 18. 19. 20.

Exemption from tax on corporations Taxation of partnerships Taxation of general professional partnerships Withholding tax a. Concept b.Kinds (1) Withholding of final tax on certain incomes

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1. What do you think is the reason why cash dividends, when received by a resident citizen or alien from a domestic corporation, are taxed only at the final tax of 10% and not at the progressive tax rate schedule under Section 24(A) of the Tax Code? Explain your answer. (5%) SUGGESTED ANSWER: The reason for imposing final withholding tax rather than the progressive tax schedule on cash dividends received by a resident citizen or alien from a domestic corporation is to ensure the collection of income tax on said income. If we subject the dividend to the progressive tax rate, which can only be done through the filing 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 difficult for the BIR to monitor compliance considering the huge number of stockholders. By shifting the responsibility to remit the tax to the corporation, it is very easy to check compliance because there are fewer withholding agents compared to the number of income recipients. Likewise, the imposition of a final withholding tax will make the tax available to the government at an earlier time. Finally, the final withholding tax will be a sure revenue to the government unlike 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 offset such loss against dividend income thereby depriving the government of the tax on said dividend income. Note: It is recommended that any of the foregoing answers can be given full credit because the question involves a policy issue which can only be found in the deliberations of Congress.  ALTERNATIVE ANSWER: The reason why cash dividends received by a resident citizen or alien from a domestic corporation are subjected to the final withholding tax of 10% and not at the progressive rate tax schedule is to lessen the impact of a second layer of tax on the same income. (BAR 2001) (2) Withholding of creditable tax at source 1. HK Co. is a Hong Kong corporation not doing business in the Philippines. It holds 40% of the shares of A Co., a Philippine company, while the 60% is owned by P Co., a Filipino-owned Philippine corporation. HK Co. also owns 100% of the shares of B Co., an Indonesian company which has a duly licensed Philippine branch. Due to worldwide restructuring of the HK Co. group, HK Co. decided to sell all its shares in A and B Cos. The negotiations for the buy-out and the signing of the  Agreement of Sale were all done in the Philippines. The Agreement provides that the purchase price will be paid to HK Co's bank account in the U.S. and that little to A and B Cos Shares will pass from HK Co. to P Co. in HK where the stock certificates will be delivered. P Co. seeks your advice as to whether or not it will subject the payments of purchase price to WT. Explain your advice. (10%) SUGGESTED ANSWER: P Co. should not subject the payments of the purchase price to withholding tax. While the seller is a nonresident foreign corporation which is not normally required to file returns in the Philippines, therefore, ordinarily all its income earned from Philippine sources is taxed via the withholding tax system, this is not the procedure availing with respect to sales of shares of stock. The capital gains tax on the sale of shares of stock of a domestic corporation is always required to be paid through capital gains tax return filed. The sale of the shares of stock of the Indonesian Corporation is not subject to income tax under our jurisdiction because the income derived therefrom is considered as a foreign- sourced income.  ALTERNATIVE ANSWER: Yes, but only on the shares of stocks of A Co. and only on the portion of the purchase price, which constitutes capital gains. Under the Tax Code of 1997, the capital gains tax imposed under Section 28(B)(5)(c) is collectible via the withholding of tax at source pursuant to Section 57 of the same Code. Page | 128

Note: The bar candidate might have relied on the provision of the Tax Code of1997 which provides that the capital gains tax is imposed as withholding taxes (Section 57, NIRC). This procedure is impractical and, therefore, not followed in practice because the buyer/ withholding agent will not be in a position to determine how much income is realized by the seller from the sale. For this reason, any of the foregoing suggested answers should be given full credit. (BAR 1999) 2. HK Co., is a Hong Kong company, which has a duly licensed Philippine branch, engaged in trading activities in the Philippines. HK Co. also invested directly in 40% of the shares of stock of A Co., a Philippine corporation. These shares are booked in the Head Office of HK Co. and are not reflected as assets of the Philippine branch. In 1998, A Co. declared dividends to its stockholders. Before remitting the dividends to HK Co., A Co. seeks your advice as to whether it will subject the remittance to WT. No need to discuss WT rates, if applicable. Focus your discussion on what is the issue. (10%) SUGGESTED ANSWER: I will advise A Co. to withhold and remit the withholding tax on the dividends. While the general rule is that a foreign corporation is the same juridical entity as its branch office in the Philippines, when, however, the corporation transacts business in the Philippines directly and independently of its branch, the taxpayer would be the foreign corporation itself and subject to the dividend tax similarly imposed on non-resident foreign corporation. The dividends attributable to the Home Office would not qualify as dividends earned by a resident foreign corporation, which is exempt from tax. (Marubeni Corporation v. Commissioner, GR No. 76573, September 14, 1989). (BAR 1999) 3. Bates Advertising Company is a non-resident corporation duly organized and existing under the laws of Singapore. It is not doing business and has no office in the Philippines. Pilipinas Garment Incorporated, a domestic corporation, retained the services of Bates to do all the advertising of its products abroad. For said services. Bates’ fees are paid through outward remittances.  Are the fees received by Bates subject to any withholding tax?  ANSWER: The fees paid to Bates Advertising Co..a non-resident foreign corporation are not subject to withholding tax since they are not subject to Philippine tax. They are exempt because they do not constitute income from Philippine sources, the same being compensation for labor or personal services performed outside the Philippines (Sec. 36(c) (3) and Sec. 25(b)(1), Tax Code). (BAR 1994) c. Withholding of VAT d.Filing of return and payment of taxes withheld (1) Return and payment in case of government employees (2) Statements and returns 1. Raffy and Wena; husband and wife, are both employed by XXX Corporation. After office hours, they jointly manage a coffee shop at the ground floor of their house. The coffee shop is registered in the name of both spouses. Which of the following is the correct way to prepare their income tax return? Write the letter only. DO NOT EXPLAIN YOUR ANSWER. (2%) [a] Raffy will declare as his income the salaries of both spouses, while Wena will declare he income from the coffee shop. [b] Wena wil declare the combined compensation income of he spouses, and Raffy will declare the income from the coffee shop. Page | 129

[c] All the income will be declared by raffy alone, because only one consolidated return is required to be filed by the spouses. [d] Raffy will declare his own compensation income and Wena will declare hers. The income from the coffee shop shall be equally divided between them. Each spouse shall be taxed separately on their corresponding taxable income to be covered by one consolidated return for the spouses. [e] Raffy will declare his own compensation income and Wena will declare hers. The income from the coffee shop shall be equally divided between them. Raffy will file one income tax return to cover all the income of both spouses, and the tax is computed on the aggregate taxable income of the spouses. SUGGESTED ANSWER: [d] Raffy will declare his own compensation and Wena will declare hers. The income from the coffee shop shall be equally divided between them. Bach spouse shall be taxed separately on their corresponding taxable income to be covered by one consolidated return for the spouses. (BAR 2009) 2. How often does a domestic corporation file income tax return for income earned during a single taxable year? Explain the process. (3%) What is the reason for such procedure? (2%) SUGGESTED ANSWER: A domestic corporation is required to file income tax returns four (4) times for income earned during a single taxable year. Quarterly returns are required to be filed for the first three quarters where the corporation shall declare its quarterly summary of gross income and deductions on a cumulative basis. (Section 75, NIRC). Then, a final adjustment return is required to be filed covering the total taxable income for the entire year, calendar or fiscal. (Section 76, NIRC). The reason for this procedure is to ensure the timeliness of collection to meet the budgetary needs of the government. Likewise, it is designed to ease the burden on the taxpayer by providing it with an installment payment scheme, rather than requiring the payment of the tax on a lump-sum basis after the end of the year.  ALTERNATIVE ANSWER: The reason for the quarterly filing of tax returns is to allow partial collection of the tax before the end of the taxable year and also to improve the liquidity of government. (BAR 2001) 3. In the year 2000, X worked part time as a waitress in a restaurant in Mega Mall from 8:00 a.m. to 4:00 p.m. and then as a cashier in a 24-hour convenience store in her neighborhood. The total income of X for the year from the two employers does not exceed her total personal and additional exemptions for the year 2000. Was she required to file an income tax return last April? Explain your answer. (5%) SUGGESTED ANSWER: Yes. An individual deriving compensation concurrently from two or more employers at any time during the taxable year shall file an income tax return (Sec. 51(A)(2)(b), NIRC.)  ALTERNATIVE ANSWER: It depends. An individual with pure compensation income is not required to file an income tax returns when she meets the following conditions; (1) the total gross compensation income does not exceed Php60,000, and (2) the income tax has been correctly withheld, meaning the tax withheld is equal to the tax due. (Section 51(A)(2)(b), NIRC). Page | 130

There is no mention in the problem of the amount of personal and additional personal exemption to quantify how much is that compensation income that did not exceed the personal and additional personal exemptions. There is no, mention, either, of whether or not the employers withheld taxes and that the amount withheld is equal to the tax due. Whether or not she will be required to file an income tax return last April 15 on the 2000 income will depend on her compliance with the requirements of the law. (BAR 2001) 4. Is a non-resident alien who is not engaged in trade or business or in the exercise of profession in the Philippines but who derived rental income from the Philippines required to file an income tax return on April of the year following his receipt of said income? If not, why not? Explain your answer. (5%) SUGGESTED ANSWER: No. The income tax on all income derived from Philippine sources by a non-resident alien who is not engaged in trade or business in the Philippines is withheld by the lessee as a Final Withholding Tax. (Section 57(A), NIRC). The government cannot require persons outside of its territorial jurisdiction to file a return; 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 file income tax returns. (Section 51, NIRC). (BAR 2001) 5.  A bachelor was employed by Corporation A on the first working day of January 1996 on a part-time basis with a salary of P3.500.00 a month. He then received the 13th month pay. In September 1996, he accepted another part-time job from Corporation B from which he received a total compensation of P14,500.00 for the year 1996. The correct total taxes were withheld from both earnings. With the withholding taxes already paid, would he still be required to file an income tax return for his 1996 income?  ANSWER: Yes, because what is exempt from filing are those individuals who have total compensation income not exceeding P60.000 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 P60.000 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 filing his income tax return (RA 7497. as implemented by RR No. 4-93). (BAR 1997) 6. Robert Patterson is an American who first arrived in the Philippines in 1944 as a member of the U.S. Armed Forces that liberated the Philippines. After the war, he returned to the United States but came back to the Philippines in 1958 and stayed here up to the present He is presently employed in the United States Naval Base. Olongapo City. For the year 1985, he earned US$10,856.00. Sometime in 1986, the District Revenue Office of the Bureau of Internal Revenue served him a notice informing him that he did not file his income tax return for the year 1985 and directing him to file said return in 10 days. He refused to file any return claiming that he is not a resident alien and is therefore not required to file any income tax return. Is Patterson’s claim correct?

 ANSWER: Patterson’s claim is not correct. While Paterson is exempt from income tax, an exemption from income tax does not, however, necessarily mean an exemption likewise from the filing of an income tax return {Garrison vs. Court of Appeals, 187 SCRA 525). (BAR 1991)

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7. The Tax Code allows an individual taxpayer to pay in two equal installments, the first installment to be paid at the time the return is filed, and the second on or before July 15 of the same year, if his tax due exceeds P2,000. SUGGESTED ANSWER: TRUE. [Sec. 56(A)(2), NIRC.] e. Final withholding tax at source f. Creditable withholding tax (1) Expanded withholding tax (2) Withholding tax on compensation 1. X owns a half-hectare property In Bacoor, Cavite which in 1980 was expropriated by the national government, through the Department of Public Works and Highways. After ten years, X was paid P2.000.000.00 as just compensation plus 6% annual interest by the DPWH but minus the withholding tax. Is the action of DPWH proper? Reasons.  ANSWER: No, the action of DPWH is not proper. In the case of Province of Tayabas vs. Perez, 66 Phil. 467. Just compensation was defined as “the just and complete equivalent of the loss which the owner of a thing expropriated has to suffer by reason of the expropriation". Further, in BIR Ruling 61-91 just compensation was defined as that which is paid by the Government equivalent to the value of the property at the time of its taking. It is the fair and full equivalent for the indemnity. Based in the foregoing it is clear therefore that the amount received after 10 years as just compensation is not in any way a profit, gain or income on the part of X In the same vein, the 6% annual interest paid by DPWH is not income. The same partakes of the nature of a penalty or indemnity due and accruing to X for having been deprived of the use and benefit by not being paid of the fair market value of the property since its taking 10 years ago. Hence, the DPWH should not have withheld taxes.  ALTERNATIVE ANSWERS: a) No. the withholding tax (presumably on capital gains) should have been based on the fair market value of the property at the time of the expropriation. Thus, in this case, for purposes of computing the withholding tax on capital gains, the amount representing the 6% annual interest should have been excluded from the withholding tax base. b) No. With respect to capital gains on sales of realty to the government, X may elect to include the same

in his gross compensation income or to pay the corresponding capital gains tax. By withholding the taxes on the just compensation (for which the basis should only be P2,000,000.00) excluding the interest) DPWH denied such option to X. c) Assuming the property is an ordinary asset, the expropriation proceedings in 1980 is not subject to

the creditable withholding tax under Revenue Memorandum Circular 7-90 clarifying Revenue Regulations Nos. 12-89 and 1 -90 implementing Section 50 (b) of the NIRC, the transfer of the property was effected in 1980. The above mentioned revenue rules and regulations are applicable only to sales, exchange or transfers of real properties consummated on or after 1 January 1990 (BIR Ruling 040-91). The 6% interest on the “just compensation" is not in the nature of an interest on Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes from trust fund and similar arrangements, the same is not subject to the 20% final withholding tax under Sec. 21 of the NIRC (BIR Ruling 040-91). (BAR 1993) Page | 132

g. Timing of withholding B. Estate tax 1. Basic principles 1. Is the approval of the court, sitting as probate or estate settlement court, required in the enforcement and collection of estate tax? Explain. (10%) SUGGESTED ANSWER: No. The approval of the court, sitting in probate, is not a mandatory requirement in the collection of estate tax. On the contrary, under Section 94 of the NIRC, it is the probate or settlement court which is forbidden to authorize the executor or judicial administrator of the decedent’s estate, to deliver any distributive share to any party interested in the estate, unless a certification from the Commissioner of Internal Revenue that the estate tax has been paid is shown. [Marcos U v. Court of Appeals, 273 SCRA 47 (1997)]. (BAR 2005) 2. VCC is the administrator of the estate of his father NGC, in the estate proceedings pending before the MM Regional Trial Court. Last year, he received from the Commissioner of Internal Revenue a deficiency tax assessment for the estate in the amount of PI, 000,000. But he ignored the notice. Last month, the BIR affected a levy on the real properties of the estate to pay the delinquent tax. VCC filed a motion with the probate court to stop the enforcement and collection of the tax on the ground that the BIR should have secured first the approval of the probate court, which had jurisdiction over the estate, before levying on its real properties. Is VCC’s contention correct? (5%) SUGGESTED ANSWER: No. VCC’s contention is not c orrect. The approval of the probate court is not necessary. Payment 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 jurisdiction. Hence, the approval of the court, sitting in probate, or as a settlement tribunal is not a mandatory requirement in the collection of estate taxes (Marcos H v. Court of Appeals, 273 SCRA 47 [1997]). (BAR 2004) 2. 3. 4. 5.

Definition Nature Purpose or object Time and transfer of properties

1.  A, aged 90 years and suffering from incurable cancer, on August 1, 2001 wrote a will and, on the same day, made several inter-vivos gifts to his children. Ten 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? Explain your answer. (5%) SUGGESTED ANSWER: Yes. When the donor makes his will within a short time of, or simultaneously with, the making of gifts, the gifts are considered as having been made in contemplation of death. (Roces v. Posadas, 58 Phil. 108). Obviously, the intention of the donor in making the inter-vivos gifts is to avoid the imposition of the estate tax and since the donees are likewise his forced heirs who are called upon to inherit, it will create a presumption juris tantum that said donations were made mortis causa, hence, the properties donated shall be included as part of A's gross estate. (BAR 2001) 2.  Are donations inter vivos and donations mortis causa subject to estate taxes?  ANSWER: Donations inter vivos are subject to donor’s gift tax (Sec. 91 (a). Tax Code) while donations mortis causa Page | 133

are subject to estate tax (Sec. 77, Tax Code). However, donations inter vivos, actually constituting taxable lifetime like transfers in contemplation of death or revocable transfers (Sec. 78 (b) and (c). Tax Code) may be taxed for estate tax purposes, the theory being that the transferor’s control thereon extends up to the time of his death.  ALTERNATIVE ANSWER: Donations inter vivos are not subject to estate taxes because the transfer of the property takes effect during the lifetime of the do nor. The transfer is therefore subject to the donor’s tax. On the other hand, donations mortis causa are subject to estate taxes since the transfer of the properties takes effect after the death of the decedent. Such donated properties, real or personal, tangible or intangible, shall form part of the gross estate. (BAR 1994) 6. 7. 8.

Classification of decedent Gross estate vis-à-vis net estate Determination of gross estate and net estate

1. Jose Ceman, Filipino citizen, married to Maria Ceman, died in a vehicular accident in NLEX on July 10, 2007. The spouses owned, among others, a 100-hectare agricultural land in Sta. Rosa, Laguna with current fair market value of P20 million, which was the subject matter of a Joint Venture  Agreement about to be implemented with Star Land Corporation (SLC), a well-known real estate development company. He bought the said real property for P2 million fifty years ago. On January 5, 2008, the administrator of the estate and SLC jointly announced their big plans to start conversion and development of the agricultural lands in Sta. Rosa, Laguna, into first-class residential and commercial centers. As a result, the prices of real properties in the locality have doubled. The Administrator of the Estate of Jose Ceman filed the estate tax return on January 9,2008, by including in the gross estate the real property at P2 million. After 9 months, the BIR issued deficiency estate tax assessment, by valuing the real property at P40 million. a) Is the BIR correct in valuing the real property at P40 million? Explain. (3%) SUGGESTED ANSWER: No. The value of the property for estate tax purposes shall be the fair market value thereof at the time of death. (Section 88(B), NIRC). b) If you disagree, what is the correct value to use for estate tax purposes? Explain. (3%) SUGGESTED ANSWER: The correct value to use for estate tax purposes is P20 million which is the current fair market value of the property at the time of the decedent's death. (Section 88(B), NIRC). (BAR 2008) 2.  Antonia Santos, 30 years old, gainfully employed, is the sister of Eduardo Santos. She died in an airplane crash. Edgardo is a lawyer and he negotiated with the Airline Company and insurance company and they were able to agree to a total settlement of P10 Million. This is what Antonia would have earned as somebody who was gainfully employed. Edgardo was her only heir. a) Is the P10 Million subject to estate tax? Reason briefly. SUGGESTED ANSWER: No. The estate tax is a tax on the privilege enjoyed by an individual in controlling the disposition of her properties to take effect upon her death. The PIOM is not a property existing as of the time of decedent’s death; hence, it cannot be said that she exercised control over its disposition. Since the privilege to transmit the property is not exercised by the decedent, the estate tax cannot be imposed thereon. Page | 134

(Definition of Estate Tax p. 184, Vitug, Compendium of Tax Law and Jurisprudence, Third Revised Edition). (BAR 2007) 3. Remedios, a resident citizen, died on November 10, 2006. She died leaving three condominium units in Quezon City valued at P5 Million each. Rodolfo was her only heir. He reported her death on December 5, 2006 and filed the estate tax return on March 30,2007. Because he needed to sell one unit of the condominium to pay for the estate tax, he asked the Commissioner of Internal Revenue to give him one year to pay the estate tax due. The Commissioner approved the request for extension of time provided that the estate tax be computed on the basis of the value of the property at the time of payment of the tax. Does the condition that the basis of the estate tax will be the value at the time of the payment have legal basis? Reason briefly. SUGGESTED ANSWER: No. The valuation of properties comprising the estate of a decedent is the fair market as of the time of death. No other valuation date is allowed by law. (Section 88, NIRC). (BAR 2007) 4. Ralph Donald, an American citizen, was a top executive of a U.S. company in the Philippines until he retired in 1999. He came to like the Philippines so much that following his retirement, he decided to spend the rest of his life in the country. He applied for and was granted a permanent resident status the following year. In the spring of 2004, while vacationing in Orlando, Florida, USA, he suffered a heart attack and died. At the time of his death, he left the following properties: (a) bank deposits with Citibank Makati and Citibank Orlando. Florida: (b) a resthouse in Orlando, Florida; (c)a condominium unit in Makati: (d) shares of stock in the Philippine subsidiary of the U.S. Company where he worked: (e) shares of stock in San Miguel Corp. and PLDT; (f) shares of stock in Disney World in Florida: (g) U.S. treasury bonds; and (g) proceeds from a life insurance policy issued by a U.S. corporation. Which of the foregoing assets shall be included in the taxable gross estate in the Philippines? Explain. (5%) SUGGESTED ANSWER: Being a resident of the Philippines at the time of his death, the gross estate of Ralph Donald shall include all his property, real or personal, tangible or intangible, wherever situated at the time of his death. (Section 85, NIRC). Thus, the following shall be included in his taxable gross estate in the Philippines: . a) b) c) d) e) f) g)

bank deposits with Citibank Makati and Citibank Orlando, Florida: a resthouse in Orlando, Florida; a condominium unit in Makati; shares of stock in the Philippine subsidiary of the U.S. company where he worked; shares in San Miguel Corp. and PLDT; shares of stock in Disney World in Florida; and U.S treasury bonds

The proceeds from a life insurance policy issued by a U.S. corporation is included as part of the gross estate of Ralph Donald, if the designation of the beneficiary is revocable or irrespective of the nature of designation, if the designated beneficiary is either the estate, the executor or administrator. If the designated beneficiary is other than the estate, executor or administrator and the designation is irrevocable, the proceeds shall not form part of his gross estate. (Section 85 (E), NIRC). (BAR 2005) 5. Discuss the rule on situs of taxation with respect to the imposition of the estate tax on property left behind by a non-resident decedent. (2%) Page | 135

SUGGESTED ANSWER: The value of the gross estate of a non-resident decedent who is a Filipino citizen 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 [Sec. 85 (A). NIRC of 1997]. These properties shall have a situs of taxation in the Philippines hence subject to Philippine estate taxes. On the other hand, in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines to the extent of the interest therein of the decedent at the time of his death shall be included in his taxable estate. Provided, that, with respect to intangible personal property, we apply the rule of reciprocity. (Ibid) (BAR 2000) 6. Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack while on a business trip to the USA. He died intestate on June 15. 2000 in New York City, leaving behind real properties situated in New York; his family home in Valle Verde, Pasig City; an office condominium in Makati City; shares of stocks in San Miguel Corporation; cash in bank; and personal belongings. The decedent is heavily insured with Insular Life. He had no known debts at the time of his death. As the sole heir and appointed Administrator, how would you determine the gross estate of the decedent? (3%) SUGGESTED ANSWER: The gross estate shall be determined by including the value at the time of his death all of the properties mentioned, to the extent of the Interest he had at the time of his death because he is a Filipino citizen. (Sec. 85 (A), NIRC of 1997] With respect to the life insurance proceeds, the amount includible in the gross estate for Philippine tax purposes would be to the extent of the amount receivable by the estate of the deceased, his executor, or administrator, under policies taken 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 beneficiary is irrevocable. [Sec. 85 (Ej, NIRC of 1997] (BAR 2000) 9.

Composition of gross estate

1. In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value (FMV) of the painting at the time of the purchase was PI-million. Yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the painting, already worth PI.5-million, to his only son, Zandro. The will also granted Zandro the power to appoint his wife, Wilma, as successor to the p ainting in the event of Zandro’s death. Zandro died in 2007, and Wilma succeeded to the property. [a] Should the painting be included in the gross estate of Xavier in 2001 and thus, be subject to estate tax? Explain. (3%) SUGGESTED ANSWER: Yes. The transmission of the property from Xavier to Zandro is subject to the estate tax because this is a property within Xavier's control to dispose upon his death. The composition of the gross estate pertains to properties owned and existing as of the time of death and to be transferred by the owner by death (Section 85, NIRC), (BAR 2009) 2. Jose Ortiz owns 100 hectares of agricultural land planted to coconut trees. He died on May 30, 1994. Prior to his death, the government, by operation of law, acquired under the Comprehensive Page | 136

 Agrarian Reform Law all his agricultural lands except five (5) hectares. Upon the death of Ortiz, his widow asked you how she will consider the 100 hectares of agricultural land in the preparation of the estate tax return. What advice will you give her?  ANSWER: The 100 hectares of land that Jose Ortiz owned but which prior to his death on May 30, 1994 were acquired by the government under CARP are no longer part of his taxable gross estate, with the exception of the remaining fiv e (5) hectares which under Sec. 78(a) of the Tax Code still forms part of “decedent's interest". (BAR 1994)

10. Items to be included in gross estate

1. Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died intestate on November 15, 2009. He left the following properties and interests: House and lot (family home) in Pasig Vacation house and lot in Florida, USA  Agricultural land in Naic, Cavite which he inherited from his father Car which is being used by his brother in Cavite Proceeds of life insurance where he named his estate as irrevocable beneficiary Household furnitures and appliances Claims against a cousin who has assets of P10,000 and liabilities of PI00,000 Shares of stock in ABC Corp, a domestic enterprise The expenses and charges on the estate are as follows: Funeral Expenses Legal fees for the settlement of the estate 500,000 Medical expenses of last illness Claims against the estate

P 800,000 1,500,000 2,000,000 500,000 1,000,000 1,000,000 100,000 100,000

P 250,000 600,000 300,000

The compulsory heirs of Don Sebastian approach you and seek your assistance in the settlement of his estate for which they have agreed to the above-stated professional fees. Specifically, they request you to explain and discuss with them the following questions. You oblige:  A. What are the properties and interests that should be included in the computation of the gross estate of the decedent? Explain. (2.5%) SUGGESTED ANSWER: All the properties and interests enumerated in the problem should be included in the gross estate of the decedent. The composition of the gross estate of the decedent who is a citizen of the Philippines includes all properties, real or personal, tangible or intangible, wherever situated and to the extent of the interest that he has thereon at the time of his death (Sec. 85, NIRC). 2. On 30 June 2000, X took out a life insurance policy on his own life in the amount of P2,000,000.00. He designated his wife, Y, as irrevocable beneficiary to P1,000,000.00 and his son, Z, to the balance of P1,000,000.00 but, in the latter designation, reserving his right to substitute him for another. On 01 September 2003, X died and his wife and son went to the insurer to collect the proceeds of X’s life insurance policy. Page | 137

 Are the proceeds of the insurance to form part of the gross estate of X? Explain. SUGGESTED ANSWER: Only the proceeds of P1,000,000.00 given to the son, Z, shall form part of the Gross Estate of X. Under the Tax Code, proceeds of life insurance shall form part of the gross estate of the decedent to the extent of the amount receivable by the beneficiary designated in the policy of the insurance except when it is expressly stipulated that the designation of the beneficiary is irrevocable. As stated in the problem, only the designation of Y is irrevocable while the insured/decedent reserved the right to substitute Z as beneficiary for another person. Accordingly, the proceeds received by Y shall be excluded while the proceeds received by Z shall be included in the gross estate of X. (Section 85(E), 1997 Tax Code) (BAR 2003) 3. Cliff Robertson, an American citizen, was a permanent resident of the Philippines. He died in Miami, Florida. He left 10.000 shares of Meralco, a condominium unit at the Twin Towers Building at Pasig. Metro Manila and a house and lot in Los Angeles, California. What assets shall be included in the Estate Tax Return to be filed with the BIR?  ANSWER: All of Mr. Robertson’ s assets consisting of10, 000 shares in the Meralco, a condominium unit in Pasig, and his house and lot in Los Angeles, California are taxable. The properties of a resident alien decedent like Mr. Robertson are taxable wherever situated (Secs. 77, 78 and 98, Tax Code). (BAR 1994) 11. Deductions from estate

1. Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died intestate on November 15, 2009. He left the following properties and interests: House and lot (family home) in Pasig Vacation house and lot in Florida, USA  Agricultural land in Naic, Cavite which he inherited from his father Car which is being used by his brother in Cavite Proceeds of life insurance where he named his estate as irrevocable beneficiary Household furnitures and appliances Claims against a cousin who has assets of P10,000 and liabilities of PI00,000 Shares of stock in ABC Corp, a domestic enterprise The expenses and charges on the estate are as follows: Funeral Expenses Legal fees for the settlement of the estate 500,000 Medical expenses of last illness Claims against the estate

P 800,000 1,500,000 2,000,000 500,000 1,000,000 1,000,000 100,000 100,000

P250,000 600,000 300,000

The compulsory heirs of Don Sebastian approach you and seek your assistance in the settlement of his estate for which they have agreed to the above-stated professional fees. Specifically, they request you to explain and discuss with them the following questions. You oblige: B. What is the net taxable estate of the decedent? Explain. (2.5%) SUGGESTED ANSWER: Page | 138

The net taxable estate of the decedent is P3,700,000.00. From the gross estate of P7 million the following deductions are allowed: (1) funeral expenses of P200,000 which is the maximum allowed by law; (2) legal fees amounting to P500,000; (3) medical expenses not to exceed P500,000; (4) Claims against the estate of P300,000; (5) family home equivalent to its fair market value (not to exceed PI million) of P800,000; and (6) standard deduction of PI million, or a total allowable deduction of P3,300,000 (Sec. 8 6, NIRC). The claim against the cousin amounting to P100,000, although includable in the gross estate, cannot be claimed as a deduction because the debtor is not yet declared insolvent. Likewise, the inherited property cannot give rise to a vanishing deduction for want of sufficient factual basis (Sec. 86, NIRC). 2. In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value (FMV) of the painting at the time of the purchase was PI-million. Yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the painting, already worth PI.5-million, to his only son, Zandro. The will also granted Zandro the power to appoint his wife, Wilma, as successor to the painting in the event of Zandro’s death. Zandro died in 2007, and Wilma succeeded to the property. [c] May a vanishing deduction be allowed in either or both of the e states? Explain. (3%) SUGGESTED ANSWER: Vanishing deduction shall be allowed to the estate of Xavier but only to the extent of Ya of the property which is the portion acquired by gift (Section 100, NIRC), The donation took place within 5 years (1999 to 2001) from the death of Xavier; hence, there is a vanishing deduction. However, Zandro’s estate will not be entitled to claim vanishing deduction because, first and foremost, the property previously taxed is not includable in his gross estate and second, even if it is includable, the present decedent died more than 5 years from the death of the previous decedent, and that;a vanishing deduction is already claimed by the previous estate involving the same property. (BAR 2009) 3. While driving his car to Baguio last month, Pedro Asuncion, together with his wife Assunta, and only son, Jaime, met an accident that caused the instantaneous death of Jaime. The following day,  Assunta also died in the hospital. The spouses and their son had the following assets and liabilities at the time of death:  Assunta Exclusive

Jaime Conjugal

Exclusive

Cash P 10,000,000 P I,200,000 Cars P 2,000,000 500,000 Land P 5,000,000 2,000,000 Residential house 4,000,000 Mortgage payable 2,500,000 Funeral expenses 300,000 a) Is the Estate of Jaime Asuncion liable for estate tax? Explain. (4%) SUGGESTED ANSWER: a) No. The estate comprised of properties of only PI.2 million is not liable to any estate tax. The estate is entitled to a standard deduction of PI million deductible from the gross estate without the benefit of substantiation, thereby placing the net estate at only P200,000. Under the graduated tax rates of the estate tax, a net estate of P200,000 is exempt. (Section 86(A)(5) and Section 84, NIRC). b) Is vanishing deduction applicable to the Estate of Assunta Asuncion? Explain. (4%) Page | 139

SUGGESTED ANSWERS: b) Yes. The cash amount of PI .2 million transferred to his parents by his death is a property previously taxed in so far as that portion attributable to his mother who died a day later is concerned. An estate tax is considered to have been paid in the previous estate if a return was filed even if there was no tax due in that return. The filing of a return is a means employed for the payment of the tax under the payas-you-file system. Considering that all the legal requirements of vanishing deduction are present, the estate of Assunta can validly claim the same. (Section 86, NIRC). (BAR 2008) 4. Vanishing deduction is availed of by taxpayers to: a. b. c. d.

correct his accounting records to reflect the actual deductions made reduce his gross income reduce his output value-added tax liability reduce his gross estate

Choose the correct answer. Explain. 5% SUGGESTED ANSWER: I choose (d), reduce his gross estate. Vanishing deduction or property previously taxed is one of the items of deduction allowed in computing the net estate of a decedent [Section 86(AX2) and 86(3X2), NIRC]). (BAR 2006) 5. On the first anniversary of the death of Y, his heirs hosted a sumptuous dinner for his doctors, nurses, and others who attended to Y during his last illness. The cost of the dinner amounted to Php 50,000.00. Compared to his gross estate, the Php 50.000.00 did not exceed five percent of the estate. Is the said cost of the dinner to commemorate his one year death anniversary deductible from his gross estate? Explain your answer. (5%) SUGGESTED ANSWER: No. This 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 qualify as a deduction. Funeral expenses may include medical expenses of the last illness but not expenses incurred after burial nor expenses incurred to commemorate the death anniversary. (De Guzman V. De Guzman, 83 SCRA 256). Medical expenses, on the other hand, are allowed only if incurred by the decedent within one year prior to his death. (Section 86(A)(6), NIRC). (BAR 2001) 6. Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack while on a business trip to the USA. He died intestate on June 15. 2000 in New York City, leaving behind real properties situated in New York; his family home in Valle Verde, Pasig City; an office condominium in Makati City; shares of stocks in San Miguel Corporation; cash in bank; and personal belongings. The decedent is heavily insured with Insular Life. He had no known debts at the time of his death. What deductions may be claimed by the estate? (3%) SUGGESTED ANSWER: The deductions that may be claimed by the estate are: 1) The actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed two hundred thousand pesos 1P200,000.00). [Sec. 86 (A) (1) (a). NIRC of 1997] 2) The Judicial expenses in the testate or Intestate proceedings.(Sec. 86(A)(1) 3) The value of the decedent's family home located in Valle Verde, Pasig City in an amount not exceeding one million pesos (PI,000,000.00), and upon presentation of a certification of the barangay captain of the locality that the same have been the decedent's family home. (Sec. 86 (A) (4), Ibid] 4) The standard deduction of PI .000.000. (Sec. 86(A)(5) Page | 140

5) Medical expenses incurred within one year from death in an amount not exceeding P500,000.(Sec. 86(A)(6) 7. What is Vanishing deductions in estate taxation?  ANSWER: Vanishing deductions or property previously taxed in estate taxation refers to the diminishing deductibility/ exemption, at the rate of 20% over a period of five (5) years until it is lost after the fifth year, of any property (situated in the Philippines) forming part of the gross estate, acquired by the decedent from a prior decedent who died within a period of five (5) years from the decedent’s death. (BAR 1994) 12. Exclusions from estate 13. Tax credit for estate taxes paid in a foreign country 14. Exemption of certain acquisitions and transmissions

1. In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value (FMV) of the painting at the time of the purchase was PI-million. Yuri paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the painting, already worth PI.5-million, to his only son, Zandro. The will also granted Zandro the power to appoint his wife, Wilma, as successor to the painting in the event of Zandro’s death. Zandro died in 2007, and Wilma succeeded to the property.

[b] Should the painting be included in the gross estate of Zandro in 2007 and thus, be subject to estate tax? Explain. (3%) SUGGESTED ANSWER: No. The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance with the desire of the predecessor is an exempt transfer (Section 87, NIRC), Zandro has no control over the disposition of the property at the time of his death; hence, the estate tax which imposed the privilege of transmitting properties upon his death will not apply.  ALTERNATIVE ANSWER: No. The property passes from Zandro to Wilma by virtue of the special power of appointment granted by Xavier. The law includes as part of the gross estate of the decedent a property passing under general (not special) power of appointment. The grantee of the power to appoint, Zandro, has no control over the disposition of the property because it is the desire of the grantor of the power that the property will go to a specific person. This being so, the painting should not be included in the gross estate of Zandro, hence, it is not subject to estate tax (Section 85(D), NIRC). (BAR 2009)

15. Filing of notice of death 16. Estate tax return

1. Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died intestate on November 15, 2009. He left the following properties and interests: House and lot (family home) in Pasig Vacation house and lot in Florida, USA  Agricultural land in Naic, Cavite which he inherited from his father

P 800,000 1,500,000 2,000,000 Page | 141

Car which is being used by his brother in Cavite Proceeds of life insurance where he named his estate as irrevocable beneficiary Household furnitures and appliances Claims against a cousin who has assets of P10,000 and liabilities of PI00,000 Shares of stock in ABC Corp, a domestic enterprise The expenses and charges on the estate are as follows: Funeral Expenses Legal fees for the settlement of the estate 500,000 Medical expenses of last illness Claims against the estate

500,000 1,000,000 1,000,000 100,000 100,000

P250,000 600,000 300,000

The compulsory heirs of Don Sebastian approach you and seek your assistance in the settlement of his estate for which they have agreed to the above-stated professional fees. Specifically, they request you to explain and discuss with them the following questions. You oblige: C. When is the due date for filing and payment of the applicable tax return and tax? Are these dates extendible? If so, under what conditions or requirements? (2.5%) SUGGESTED ANSWER: The filing of the return and payment of the tax is within 6 months from date of death following the pay-asyou-file concept. The period to file the return is extendible for a maximum of 30 days under meritorious cases as maybe determined by the Commissioner. The payment of the estate tax may also be extended when the Commissioner finds that the payment of the tax on the due date would impose undue hardship upon the estate or any of the heirs. The period of extension to pay shall not exceed 5 years if the estate is settled through the courts, or shall not exceed 2 years if settled extrajudicially. The Commissioner may require the executor, or administrator, or the beneficiary to furnish a bond in an amount not more than double the amount of estate tax due (Sec. 92, NIRC). 2. Remedios, a resident citizen, died on November 10, 2006. She died leaving three condominium units in Quezon City valued at P5 Million each. Rodolfo was her only heir. He reported her death on December 5, 2006 and filed the estate tax return on March 30,2007. Because he needed to sell one unit of the condominium to pay for the estate tax, he asked the Commissioner of Internal Revenue to give him one year to pay the estate tax due. The Commissioner approved the request for extension of time provided that the estate tax be computed on the basis of the value of the property at the time of payment of the tax. a) Does the Commissioner of Internal Revenue have •the power to extend the payment of estate tax? If so, what are the requirements to allow such extension? SUGGESTED ANSWER: Yes. The Commissioner may allow an extension of time to pay the estate tax if the payment on the d ue date would impose undue hardship upon the estate or any of the heirs. The extension, in any case, will not exceed two years if the estate is hot under judicial settlement or five years if it is under judicial settlement. The Commissioner may also require the posting of a bond to secure the payment of the tax. (Section 91(B), NIRC).  ALTERNATIVE ANSWER: Yes. The requirements to be complied with so that an extension may be allowed are: (1) a request for extension must be filed before the expiration of the original period to pay which is within 6 months from death; (2) there must be a finding that the payment on the due date of the estate tax would impose undue Page | 142

hardship upon the estate or any of the heirs; (3) the extension must be for a period of not exceeding 5 years if the estate is settled judicially or 2 years if settled extrajudicially; and (4) the Commissioner may require the posting of a bond in an amount not exceeding double the amount of tax to secure the payment thereof. (Section 91(B), NIRC). (BAR 2007) 3. Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack while on a business trip to the USA. He died intestate on June 15. 2000 in New York City, leaving behind real properties situated in New York; his family home in Valle Verde, Pasig City; an office condominium in Makati City; shares of stocks in San Miguel Corporation; cash in bank; and personal belongings. The decedent is heavily insured with Insular Life. He had no known debts at the time of his death. When and where shall the return be filed and estate tax paid? (3%) SUGGESTED ANSWER: The estate tax return shall be filed within six (6) months from th e decedent’s death (Sec. 90 (B), NIRC of 1997], provided that the Commissioner of Internal Revenue shall have authority to grant in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return. (Sec. 90 (c). Ibid] Except in cases where the Commissioner of Internal Revenue otherwise permits, the estate tax return shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of Pasig City, the City in which the decedent Mr. de la Cruz was domiciled at the time of his death. [Sec. 90 (D), NIRC of 1997) (BAR 2000) 4.  A died, survived by his wife and three children. The estate tax was properly paid and the estate settled and divided and distributed among the four heirs. Later, the BIR found out that the estate failed to report the income received by the estate during administration. The BIR issued a deficiency income tax assessment plus interest, surcharges and penalties. Since the 3 children are residing abroad, the BIR sought to collect the full tax deficiency only against the widow. Is the BIR correct? (10%) SUGGESTED ANSWER: Yes, the BIR is correct. In a case where the estate has been distributed to the heirs, the collection remedies available to the BIR in collecting tax liabilities of an estate may either (1) sue all the heirs and collect from each of them the amount of tax proportionate to the inheritance received or (2) by virtue of the lien created under Section 219, sue only one heir and subject the property he received from the estate to the payment of the estate tax. The BIR, therefore, is correct in pursuing the second remedy although this will give rise to the right of the heir who pays to seek reimbursement from the other heirs. (CIR v. Pineda, 21 SCRA 105). In no case, however, can the BIR enforce the tax liability in excess of the share of the widow in the inheritance. (BAR 1999) 5. On September 10, 1991, a Bank Manager of People’s Bank, Inc. (PBI), upon reading an obituary announcing the death of Mr. Roberto Diaz refused to allow one of his heirs to withdraw Mr. Diaz’ deposit amounting to P2 Million.  A week later, immediately following said denial, the administrator of the estate sued the Bank/Bank Manager to compel them to release the money since such act was arbitrary and constituted a denial of property/constitutional rights. If you are retained as counsel by the Bank/Bank Manager to defend their stand in refusing to release the P2 Million to the heirs, what would you raise as a legal defense? Discuss.  ANSWER: I would raise the defense that under Sec. 90 of the NIRC a bank with knowledge of the death of a person who maintains a deposit account with such bank shall allow withdrawals therefrom only if the mandatory Page | 143

requirement of a certification from the Commissioner that the taxes due thereon have been paid could be presented by an heir. Absent such certification, a bank is authorized to withhold the release of deposits of a decedent. Under the same set of facts, would you, as administrator of the estate, rather file an administrative appeal with the Commissioner of Internal Revenue or a petition for review with the Court of Tax  Appeals? Explain.  ANSWER: An administrative appeal to the Commissioner of Internal Revenue would not be a proper remedy without an original proceeding having first been filed with the BIR A petition for review with the Court of Tax Appeals, on the other hand, requires a final decision of the Commissioner, the CTA being a court of exclusive appellate jurisdiction. As administrator, I would cause the payment of the proper taxes on the deposits and thereafter, secure the required certification from the Commissioner. (BAR 1992) 6. If the Commissioner of Internal Revenue allows the administrator of the estate or the heirs of the decedent to withdraw from the deposit account, what are the conditions under the Tax Code which have to be met first?  ANSWER: Before withdrawals on deposits of a decedent could be permitted, the proper taxes should first be paid and a certification of such payment secured from the Commissioner. However, the Commissioner may authorize the withdrawal without a certification provided the amount to be withdrawn shall not exceed P 10,000.00.  ALTERNATIVE ANSWER: Payment of the tax or the filing of a bond would, in substance, be enough for the Commissioner to allow the withdrawal. (BAR 1992) C. Donor’s tax 1. Basic principles 2. Definition 3. Nature 4. Purpose or object 5. Requisites of valid donation 6. Transfers which may be constituted as donation a. Sale/exchange/transfer of property for insufficient consideration 1. Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died intestate on November 15, 2009. He left the following properties and interests: House and lot (family home) in Pasig Vacation house and lot in Florida, USA  Agricultural land in Naic, Cavite which he inherited from his father Car which is being used by his brother in Cavite Proceeds of life insurance where he named his estate as irrevocable beneficiary Household furnitures and appliances

P 800,000 1,500,000 2,000,000 500,000 1,000,000 1,000,000 Page | 144

Claims against a cousin who has assets of P10,000 and liabilities of PI00,000 Shares of stock in ABC Corp, a domestic enterprise The expenses and charges on the estate are as follows: Funeral Expenses Legal fees for the settlement of the estate 500,000 Medical expenses of last illness Claims against the estate

100,000 100,000

P250,000 600,000 300,000

The compulsory heirs of Don Sebastian approach you and seek your assistance in the settlement of his estate for which they have agreed to the above-stated professional fees. Specifically, they request you to explain and discuss with them the following questions. You oblige: SUGGESTED ANSWER: If the renunciation is a general renunciation such that the share of the heir who waives his right to the inheritance goes to the other co-heirs in accordance with their respective interest in the inheritance, the law on accretion applies and the property waived is considered to pass through the other co-heirs by inheritance; hence, it has no tax implication. Undoubtedly, when the compulsory heir renounced his share in the inheritance, he did not donate the property which had never become his. Such being the case, the renunciation is not subject to the donor's tax. If it is not a general renunciation in favor of the other co-heirs, the heir renouncing his right is considered to have made a donation and the renunciation is subject to donor’s tax. In both cases, however, the renunciation has no tax implication to the other co-heirs (BIR Ruling No. DA-(DT-039) 396-09, dated July 23, 2009). 2.  ABC Corporation sold a real property in Malolos, Bulacan to XYZ Corporation. The property has been classified as residential and with a zonal valuation of PI,000 per square meter. The capital gains tax was paid based on the zonal value. The Revenue District Officer (RDO), however, refused to issue the Certificate Authorizing Registration for the reason that based on his ocular inspection the property should have a higher zonal valuation determined by the Commissioner of Internal Revenue because the area is already a commercial area. Accordingly, the RDO wanted to make a recomputation of the taxes due by using the fair market value appearing in a nearby bank’s valuation list which is practically double the existing zonal value. The RDO also wanted to assess a donor’s tax on the difference between the selling price based on the zonal value and the fair market value appearing in a nearby bank’s valuation list. Should the difference in t he supposed taxable value be legally subject to donor’s tax? Reason briefly. SUGGESTED ANSWER: No. The difference in the supposed taxable value cannot be legally subject to the donor’s tax, because the use of a fair market value other than that prescribed by the Tax Code is not allowed for computing any internal revenue tax. (Section 6(E), NIRC).  ALTERNATIVE ANSWER: The difference in value is not subject to donor’s tax, because the sale is not for an insufficient consideration. A deemed gift subject to tax arises only if a tax is avoided as a result of selling a property at a price lower than its fair market value. In a sale subject to the 6% capital gains tax, the tax is always based on the gross selling price or fair market value, whichever is higher, and therefore, the seller cannot avoid any tax by selling his property below its fair market value. This means that the deemed gift provision provided for under the Tax Code will not apply to a sale of real property subject to the 6% capital gains tax. (Section 100, NIRC). (BAR 2007) Page | 145

b.Condonation/remission of debt 1.  An insolvent company had an outstanding obligation of P100.000.00 from a creditor. Since it could not pay the debt, the creditor agreed to accept payment through dacion enpago a property which had a market value of P30,000.00. In the dacion en pago document, the balance of the debt was condoned. (a) What is the tax effect on the discharge of the unpaid balance of the obligation on the debtor corporation? (b) Insofar as the creditor is concerned, how is he effected taxwise as a consequence of the transaction?  ANSWER: (a) The condonation of the unpaid balance of the obligation has the effect of a donation made on the part of the creditor. It is obvious that the creditor merely desires to benefit the 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 latter's gross income (Sec.50, RR No. 2); (b) For the difference of P70.000, the creditor shall be subject to donor’s tax at the applicable rates provided for under the National Internal Revenue Code.  ALTERNATIVE 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 debt which has no tax consequence to the debtor. (b) The write-off of the bad debt will entitle the creditor to claim the same as a deduction from its gross income. (BAR 1997) 2. Mr. Francisco borrowed P10,000.00 from his friend Mr. Gutierrez payable in one year without interest. When the loan became due Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was unable to pay because of business reverses. Mr. Gutierrez took pity on Mr. Francisco and condoned the loan. Mr. Francisco was solvent at the time he borrowed the P 10,000.00 and at the time the loan was condoned. Did Mr. Francisco derive any income from the cancellation or condonation of his indebtedness? Explain.  ANSWER: No, Mr. Francisco did not derive any income from the cancellation or condonation of his indebtedness. Since 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 latter’s gross income. (BAR 1995)

7.

Transfer for less than adequate and full consideration

1.  A, an individual, sold to B. his brother-in-law, his lot with a market value of P1,000.000 for P600.000. A’s cost in the lot is P100,000. B is financially capable of buying the lot.  A also owns X Co.. which has a fast growing business. A sold some of his shares of stock in X Co. to his key executives in X Co. These executives are not related to A. The selling price is P3.000.000, which is the book value of the shares sold but with a market value of P5,000,000. A’s cost in the shares sold is PI ,000,000. The purpose of A in selling the shares is to enable his key executives to Page | 146

acquire a propriety of A in selling the shares is to enable his key executives to acquire a propriety interest in the business and have a personal stake in its business. Explain if the above transactions are subject to donor's tax. (5%) SUGGESTED ANSWER: The first transaction where a lot was sold by A to his brother-in-law for a price below its fair market value will not be subject to donor's tax if the lot qualifies as a capital asset. The transfer for less than adequate and full consideration, which gives rise to a deemed gift, does not apply to a sale of property subject to capital gains tax. (Section 100, NIRC). However, if the lot sold is an ordinary asset, the excess of the fair market value over the consideration received shall be considered as a gift subject to the donor's tax. The sale of shares of stock below the fair market value thereof is subject to the donor's tax pursuant to the provisions of Section 100 of the Tax Code. The excess of the fair market value over the selling price is a deemed gift.  ALTERNATIVE ANSWER: The sale of shares of stock below the fair market value will not give rise to the imposition of the donor's tax. In determining the gain from the transfer, the selling price of the shares of stocks shall be the fair market value of the shares of stocks transferred. (Section 6, RR No. 2- 82). In which case, the reason for the imposition of the donor's tax on sales for inadequate consideration does not exist. (BAR 1999) 8.

Classification of donor

1. Miguel, a citizen and resident of Mexico, donated US$1,000.00 worth of stocks in Barack Motors Corporation, a Mexican company, to his legitimate son, Miguelito, who is residing in the Philippines and about to be married to a Filipino girlfriend. Mexico does not impose any transfer tax of whatever nature on all gratuitous transfers of property. lb] Is Miguel entitled to the rule of reciprocity in order to be exempt from the Philippine donor’s tax? Why or why not? (3%)

SUGGESTED ANSWER: No. The donation is not subject to the Philippine donor's tax because the donor is a non -resident alien and the property donated is a property not situated in the Philippines. The rule of reciprocity applies only if the property transferred by a non- resident alien is an intangible personal property situated in the Philippines. This is designed to reciprocate the exemption from donor's tax granted by a foreign country to Filipinos who are not residing thereat. (Section 104, NIRC). (BAR 2009) 2. X, a multinational corporation doing business in the Philippines donated 100 shares of stock of said corporation to Mr. Y, its resident manager in the Philippines. What is the tax liability, if any, of X corporation?  ANSWER: Foreign corporations effecting a donatio n is subject to donor’s tax only if the property donated is located in the Philippines. Accordingly, donation of a foreign corporation of its own shares of stocks in favor of resident employees, is not subject to donor’s tax (BIR Ruling No. 018 -87, January 26, 1987). However, if 85% of the business of the foreign corporation is located in the Philippines or the shares donated have acquired business situs in the Philippines, the donation may be taxed in the Philippines subject to the rule of reciprocity. 9. Determination of gross gift 10. Composition of gross gift Page | 147

11. Valuation of gifts made in property

3. Kenneth Yusoph owns a commercial lot which he bought many years ago for PI Million. It is now worth P20 Million although the zonal value is only P15 Million. He donates one- half pro-indiviso interest in the land to his son Dino on 31 December 1994, and the other one-half pro-indiviso interest to the same son on 2 January 1995. 1) How much is the value of the gifts in 1994 and 1995 for purposes of computing the gift tax? Explain. 2) The Revenue District Officer questions the splitting of the donations into 1994 and 1995. He says that since there were only two (2) days separating the two donations they should be treated as one. having been made within one year. Is he correct? Explain. 3) Dino subsequently sold the land to a buyer for P 20 Million. How much did Dino gain on the sale? Explain. 4) Suppose, instead of receiving the lot by way of donation, Dino received it by inheritance. What would be his gain on the sale of the lot for P20 Million? Explain.  ANSWER: 1) The value of the gifts for purposes of computing the gift tax shall be P 7.5 million in 1994 and P7.5millionin 1995. 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 market value as determined by the Commissioner {which is the zonal value fixed pursuant to Section 16(e) of the Tax Code), or (b) the fair market value as shown in the schedule of values fixed by the Provincial and City Assessors. The fact that the property is worth P20 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 Section 81 of the Tax Code. 2) The Revenue District Officer is not correct because the computation of the gift tax is cumulative but only insofar as gifts made within the same calendar year. Therefore, there is no legal Justification for treating two gifts effected in two separate calendar years as one gift. 3) Dino gained an income of 19 million from the sale. Dino acquires a carry-over basis which is the basis of the property in the hands of the donor or PI million. The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain (Sec. 34(a), NIRC). Since the property was acquired 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 acquired by gift. Hence, the gain is computed by deducting the basis of PI million from the amount realized which is P20 million. 4) If the commercial lot was received by inheritance the gain from the sale for P20 million is P5 million because the basis is the fair market value as of the date of acquisition. The stepped-up basis of P15 million which is the value for estate tax purposes is the basis for determining the gain (Sec. 34(b)(2), NIRC).  ALTERNATIVE ANSWER: If Dino 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 Dino’s business, then upon sale thereof there is presumed to be realized an income of P20 million which is the gross selling price of the property. (Sec. 21(e), NIRC). The same would be subject to the 5% capital gains tax. (BAR 1995)

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12. Tax credit for donor’s taxes paid in a foreign country 13. Exemptions of gifts from donor’s tax

1. Miguel, a citizen and resident of Mexico, donated US$1,000.00 worth of stocks in Barack Motors Corporation, a Mexican company, to his legitimate son, Miguelito, who is residing in the Philippines and about to be married to a Filipino girlfriend. Mexico does not impose any transfer tax of whatever nature on all gratuitous transfers of property. [a] Is Miguel entitled to claim a dowry exclusion? Why or why not? (3%) SUGGESTED ANSWER: Miguel, a non-resident alien, is not allowed any dowry exclusion. The dowry applies only to a donor who is either a citizen or resident of the Philippines (Section 101(AX1), NIRC). (BAR 2009) 2. The Congregation of the Mary Immaculate donated a land and a dormitory building located along Espana St. in favor of the Sisters of the Holy Cross, a group of nuns operating a free clinic and high school teaching basic spiritual values. Is the donation subject to donor’s tax? Reason briefly. SUGGESTED ANSWER: No. Gifts in favor of an educational and/or charitable, religious, social welfare corporation, or cultural institution, accredited non-government organization, trust or philanthropic organization or research institution or organization are exempt from the donor's tax, provided, that, not more than 30% of the gifts are used for administration purposes. The donation being in the nature of a real property complies with the utilization requirement. (Section 101(A)(3), NIRC). (BAR 2007) 3. What conditions must occur in order that all grants, donations and contributions to non-stock, non-profit private educational institutions may be exempt from the donor’s tax under Section 101 (a) of the Tax Code? (3%) SUGGESTED ANSWER: The following are the conditions: 1) Not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes; 2) The educational institution is incorporated as a non¬stock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all its income, whether students' fees or gifts, donations, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. [Sec. 101 (A) (3), NIRC of 1997) (BAR 2000) 4.  Ace Tobacco Corporation bought a parcel of land situated at Pateros and donated it to the Municipal Government of Pateros 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 Municipal Government of Pateros issued to the occupants/beneficiaries Certificates of Award giving to them the respective areas where their houses are erected. Through Ordinance No.2. Series of 1998, the said municipal government ordained that the lots awarded to the awardees/donees be finally transferred and donated to them. Determine the tax consequence of the foregoing dispositions with respect to Ace Tobacco Corporation, the Municipal Government of Pateros, and the occupants/beneficiaries. [5%] SUGGESTED ANSWER: The donation by Ace Tobacco Corporation is exempt from the donor's tax because it qualifies as a gift to or for the use of any political subdivision of the National Government (Section 101(2), NIRC). The conveyance is likewise exempt from documentary stamp tax because it is a transfer without consideration. Page | 149

Since the donation is to be used as a relocation site for the less fortunate constituents of the municipality, it may be considered as an undertaking for human settlements, hence the value of the land may be deductible in full from the gross income of Ace Tobacco Corporation if in accordance to a National Priority Plan determined by the National Economic Development Authority. (Sec. 34[H](2)(a), NIRC). If the utilization is not in accordance to a National Priority Plan determined by the National Economic Development Authority, then Ace Tobacco Corporation may deduct the value of the land donated only to the extent of five (5%) percent of its taxable income derived from trade or business as computed without the benefit of the donation. (Sec. 34[Hl(2)(a) in relation to Sec. 34[H](1), NIRC). The Municipality of Pateros is not subject to any donor’s tax on the value of land it subsequently donated, it being exempt from taxes as a political subdivision of the National Government.

The occupants/beneficiaries are subject to real property taxes because they now own the land.  Alterative Answer on Taxability of Municipality and Awardees: The awarding by the Municipal Government of lots to specific awardees or d onees is likewise exempt from the donor's tax because it is only an implementation of the purpose for which the property was given by Ace Tobacco Corporation. The purpose of the first donation is to devote the land as a relocation site for the less fortunate constituents. If later on the Municipality gives out Certificates of Award over specific lots occupied by the qualified occupants/beneficiaries, this is intended to perpetuate the purpose of the previous donor, the Municipality acting merely as a conduit and not the true donor. This is simply a donation by the Municipality in form but not in substance. The receipt by the occupant beneficiaries of their respective lots through the Certificate of Award has no tax implications. They are, however, liable for real property taxes. (BAR 1998) 5. Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council, a sports associa¬tion duly accredited by the Philippine Boxing Association. Onyoc received the amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to collect income tax on the amount received by Onyoc and donor’s tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.  ANSWER: The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the income tax. RA. No. 7549 explicitly provides that “All prizes and awards granted to athletes in local and International sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt from income tax". Neither is the BIR correct in collecting the donor’s tax from Ayala Land Corporation. The law is clear when it categorically stated “That the donor’s of said prizes and awards shall be exempt from the payment of the donor’s tax." (BAR 1996)

6. In 1991. Imelda gave her parents a Christmas gift of P 100.000.00 and a donation of P80.000.00 to her parish church. She also donated a parcel of land for the construction of a building to the PUP  Alumni Association, a non-stock, non-profit organization. Portions of the building shall be leased to generate income for the association. (a) Is the Christmas gift of P100.000.00 to Imelda's parents subject to tax? (b) How about the donation to the parish church? (c) How about the donation to the P.U.P, Alumni Association?  ANSWER: (a) The Christmas gift of PI00,000.00 given by Imelda to her parents is taxable up to P50.000.00because under the law (Sec. 92 (a) of the Tax Code), net gifts not exceeding P50.000.00 are exempt. Page | 150

(b) (b) The donation of P80.000.00 to the parish church even assuming that it is exclusively for religious purposes is not tax-exempt because the exemption granted under Article VI. Sec. 28(3) of the Constitution applies only to real estate taxes [Uadoc v. Commissioner, 14 SCRA 292). (c) (c) The donation to the P.U.P. Alumni Association does not also qualify for exemption both under the Constitution and the aforecited law because it is not an educational or research organization, corporation, institution, foundation or trust.

 ALTE  ALTERN RNAT ATIV IVE E ANSW ANSWER ER:: Donation to the P.U.P. Alumni Association is exempt from donor's tax if it is proven that the association is a nonstock, non-profit charitable association, paying no dividends, governed by trustees who receive no compensation, and devoting all its income to the accomplishment and promotion of the purposes enumerated in its articles of incorporation. Not more than 30% of the gift should be used for administration purposes purposes by the donee. (BAR 1994) 7. Can you name one kind of gift that is exempt from donor’s tax which is extendible to both residents and nonresidents or non-citizens of the Philippines? Include qualifications, If any.  ANSWER: Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not conducted for profit, or to any political subdivision of the said Government are exempt from gift tax with respect to both residents and non-residents. (BAR 1992) 14. Person liable 15. Tax basis

1. Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a residential house and lot in Quezon City. After the recent wedding of their son, Mario, to Maria, the spouses donated said real property to them. At the time of donation, the real property has a fair market value of P2 million.  Are Jose and Clara subject to donor’s tax? If so, how much is the taxable gift of each spous e and what rate shall be applied to the gift? Explain. (4%)

SUGGESTED ANSWERS: Yes. Jose and Clara are subject to donor’ s tax. Since the real property is either conjugal or absolute community property, each spouse is deemed to have made separate donation of one-half of the value of the property [Tang Ho v. Board of Tax appeals, 97 Phil. 899 [1955]). For Jose, he is considered to have made two donations: one, is in favor of his son who is a relative, and two, in favor of his son’s wife who is a stranger. The taxable gift to the son is P490,000 computed by deducting from the gross gift the dowry exclusion of P10,000. The net gift is subject to the graduated tax rates of 2% to 15%. The taxable gift to his son’s wife is P500,000 subject to the 30% flat rate on donation to strangers. (Sections 99 and 101, NIRC). Clara is subject to the donor’s tax in exactly the same manner as J ose, being considered to have effected likewise two donations. (BAR 2008)

2. Your bachelor client, a Filipino residing in Quezon City, wants to give his sister a gift of Php 200,000.00. He seeks your advice, for purposes of reducing if not eliminating the donor’s tax on the gift, on whether it is better for him to give all of the Php 200,000.00 on Christmas 2001 or to give Php 100,000.00on Christmas 2001 and the other Php 100,000.00 on January 1, 2002. Please explain your advice. (5%) Page | 151

SUGGESTED ANSWER: I would advise him to split the donation. Giving the Php200,000 as a one-time donation would mean that it will be subject to a higher tax bracket under the graduated tax structure thereby necessitating the payment of donor's tax. On the other hand, splitting the donation into two equal amounts of Php100,000 given on two different years will totally relieve the donor form the donor is tax because the first Php l00, 000 donation in the graduated brackets is exempt. (Section 99, NIRC). While the donor is tax is computed on the cumulative donations, the aggregation of all donations made by a donor is allowed only over one calendar year. (BAR 2001) 3. When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. For purposes of this tax, who is a stranger? (2%) SUGGESTED ANSWER: A stranger is a person who is not a: 1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or 2) Relative by consanguinity in the collateral line within the fourth degree of relationship." [Sec. 98 (B), NIRC of 1997] (BAR 2000) 4. Kenneth Yusoph owns a commercial lot which he bought many years ago for PI Million. It is now worth P20 Million although the zonal value is only P15 Million. He donates one- half pro-indiviso interest in the land to his son Dino on 31 December 1994, and the other one-half pro-indiviso interest to the same son on 2 January 1995. The Revenue District Officer questions the splitting of the donations into 1994 and 1995. He says that since there were only two (2) days separating the two donations they should be treated as one having been made within one year. Is he correct? Explain.  ANSWER: The Revenue District Officer is not correct because the computation of the gift tax is cumulative but only insofar as gifts made within the same calendar year. Therefore, there is no legal Justification for treating two gifts effected in two separate calendar years as one gift. (BAR 1995) 5. Mr. Bill Morgan, a Canadian citizen and a resident of Scarborough, Ontario, sends a gift check of $20,000.00 to his future Filipino daughter-in-law who is to be married to his only son in the Philippines. Is the donation by Mr. Morgan subject to tax? Explain.  ANSWER: Yes. While the gift has been made on account of marriage, to qualify for exemption to the extent of the first P10, 000 (now P50.000.00) of the value thereof, such gift should have been given to a legitimate, recognized natural or adopted child of the donor.  ALTERNATIVE ANSWER: ANSWER: It is not subject to tax because the gift was made outside the Philippines. What is the tax consequences, if any, to the donee (Filipino daughter-in-law of Mr. Morgan)?  ANSWER: The gift, with respect to the donee, is excluded from gross income and is exempt from Income taxation. There is no donee’s gift tax. (BAR 1992)

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D. Value-Added Tax (VAT) 1. Concept 1. Your client. United Market Cooperative is requesting the Commissioner of Internal Revenue to exempt it from the payment of VAT on its purchase of prime commodities from food suppliers/manufacturers on the ground that it is exempt from all taxes, including VAT, under RA. No. 6938, the Cooperative Code of the Philippines. Do you think your client can obtain the necessary exemption from the BIR? If your answer is in the affirmative, explain the basis for the grant. If in the negative, state the basis for the rejection of the request.  ANSW  ANSWER ER:: 1) An exemption is not necessary. The value added tax is not on the purchase but on the sellers, except in importation. 2)

No. The exemption to which the taxpayers are entitled to refers to those taxes that are levied on the exempt taxpayer or directly imposed on the exempted goods. The value added tax is imposed on the sellers of goods and services, not the purchaser.

 ALTERNATIVE ANSWER: ANSWER: Yes. Under the NIRC, transactions which are exempted by special laws from the payment of value-added taxes shall be so exempt. RA 6938.the Cooperative Code of the Philippines is a special law entitling the United Market Cooperative in the case at bar to exemption from VAT. (BAR 1992) 2. Newtex International (Phils.) Inc. is an American firm duly authorized to engage in business in the Philippines as a branch office. In its activity of acting as a buying agent for foreign buyers of shirts and dresses abroad and performing liason work between its home office and the Filipino garment manufacturers and exporters. Newt ex does not generate any income. To finance its office expenses here, its head office abroad regularly remits to it the needed amount. To oversee its operations and manage its office here, which had been in operation for two (2) years, the head office assigned three (3) foreign personnel. Is Newtex International (Phils.) Inc. subject to VAT?  ANSW  ANSWER ER:: Newtex International (Phils.) Inc.. is not subject to VAT. The VAT is imposed on sellers and not on buyers. The branch office did not derive any income or compensation so as to possibly permit the imposition of a VAT on compensation for services rendered. In addition, since the transactions are direct export sales, the VAT does not apply. Export sales are among those that are either zero rated or exempt from VAT (Secs. 99-100, NIRC). (BAR 1991)

2.

Characteristics/Elements Characteristi cs/Elements of a VAT-Taxable V AT-Taxable transaction

1. What are the characteristics of the Value-Added Tax?  ANSWER: The 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. Page | 153

 ALTERNATIVE ANSWER: ANSWER: The value-added tax has the following characteristics: a. b. c. d. e.

It is an indirect tax where tax shifting is always presumed: It is consumption-based; consumption-based; It is imposed on the value-added in each stage of distribution; It is a credit-invoice method value-added tax; and It is not a cascading tax. (BAR 1996) 3. 4. 5.

Impact of tax Incidence of tax Tax credit method

1. JKL Corporation is a domestic corporation engaged in the importation importation and sale of motor vehicles in the Philippines and is duly registered with the Subic Bay Metropolitan Authority (SBMA). In December 2007, it imported several second-hand motor vehicles from Japan and Korea, which it stores in a warehouse in Subic Bay. It sold these motor vehicles in April 2008, to persons residing in the customs territory. te rritory.  A) Are the importations of motor vehicles from abroad subject to customs duties and value added taxes? Explain. (4%) SUGGESTED ANSWER: a) No. The importation importation from abroad to the Subic Bay Freeport Freeport Zone is exempt from customs duties and value-added taxes. The Freeport Zone is an extension of a foreign territory so that the vehicles imported while still within its secured perimeter is not subject to Philippine taxes. (RMC No. 50-2007; Seagate Technology Inc., v. Commissioner, 451 SCRA 132 [2005]). (BAR 2008) 6. 7.

Destination principle Persons liable

1. Melissa inherited from her father a 300-square- meter lot. At the time of her father’s death on March 14, 1995, the property was valued at P720,000.00. On February 28, 1996, to defray the cost of the medical expenses of her sick son, she sold the lot for P600.000.00, on cash basis. The prevailing market value of the property at the time of the sale was P3.000.00 per square meter. Is Melissa liable to pay Value Added Tax (VAT) on the sale of the property? If so, how much and why? If not, why not? (4%) SUGGESTED ANSWER: No, Melissa is not liable to pay the VAT because she is not in the real estate business. A sale, of real property not in the course of trade or business is not subject to VAT (Section 105 and Section 109(1)(P), NIRC). (BAR 2009) 2. Who are liable for the payment of Value-Added Tax?  ANSWER: The persons liable for the value-added value -added tax are: a. Sellers of goods and properties in the course of trade or business: b. Sellers of services in the course of trade or business, including lessors of goods and properties: c. Importers of taxable goods, whether in the course of business or not (BAR 1996) Page | 154

8.

VAT on sale of goods or properties

1.  Are the following transactions subject to VAT? If yes, what is the applicable rate for each transaction. State the relevant authority/ies for your answer. Sale of orchids by a flower shop which raises its flowers in Tagaytay. (3%) SUGGESTED ANSWER: The sale of orchids is subject to VAT at 12%. This is a sale of agricultural non-food product in its original state which is no longer one of the exempt transactions. (Sec. 109, NIRC, as amended by RA No. 9337). 2. Melissa inherited from her father a 300-square- meter lot. At the time of her father’s death on March 14, 1995, the property was valued at P720,000.00. On February 28, 1996, to defray the cost of the medical expenses of her sick son, she sold the lot for P600.000.00, on cash basis. The prevailing market value of the property at the time of the sale was P3.000.00 per square meter. Is Melissa liable to pay Value Added Tax (VAT) on the sale of the property? If so, how much and why? If not, why not? (4%) SUGGESTED ANSWER: No. The real property sold, being in the nature of a c apital asset, is not subject to VAT. The sale is subject to VAT only if the real property sold is held primarily for sale to customers or held for lease in the ordinary course of trade or business. A real property classified as a capital asset does not include a real property held for sale or for lease, hence, its sale is not subject to VAT (Section 39 and Section 106, NIRC). (BAR 2009) 3. State whether the following transactions are a) VAT Exempt, b) subject to VAT at 10%; or c) subject to VAT at 0%: Sale of tractors and other agricultural implements by Bungkal Incorporated to local farmers. [1%] SUGGESTED ANSWER: VAT at 10%. Tractors and other agricultural implements fall under the definition of goods which include all tangible objects which are capable of pecuniary estimation (Sec. 106[A](1), NIRC, the sales of which are subject to VAT at 10%. (BAR 1998) 4. State whether the following transactions are a) VAT Exempt, b) subject to VAT at 10%; or c) subject to VAT at 0%: Sale of RIW by Cely's Boutique, a Filipino dress designer, in her dress shop and other outlets. (1%1 SUGGESTED ANSWER: This is subject to VAT at 10%. This transaction also falls under the definition of goods which include all tangible objects which are capable of pecuniary estimation (Sec. 106[A](1), NIRC, the sales of which are subject to VAT at 10%. (BAR 1998) 5. What is the basis of the Value-Added Tax on taxable sales of real property?  ANSWER: The basis of the Value- Added Tax on taxable sale of real property is “Gross Selling Price" which is either selling price stated in the sale document or the “Zonal Value", whichever is higher. In the absence of zon al values, the gross selling price shall refer to the market value as shown in the latest tax declaration or the consideration, whichever is higher. (BAR 1996) Page | 155

a. Requisites of taxability of sale of goods or properties 9. Zero-rated sales of goods or properties, and effectively zero-rated sales of goods or properties 1. Royal Mining is a VAT-registered domestic mining entity. One of its products is silver being sold to the Bangko Sentral rig Pilipinas. It filed a claim with the BIR for tax refund on the ground that under Section 106 of the Tax Code, sales of precious metals to the Bangko Sentral are considered export sales subject to zero-rated VAT. Is Royal Mining’s claim meritorious? Explain. 5%

SUGGESTED ANSWER: No, Royal Mining's claim is not meritorious because it is the sale to the Bangko Sentral ng Pilipinas of gold and not silver which is considered as export sale subject to zero-rated VAT (Section 106(A)(2)(a), NIRC). Note: There seems to be confusion as to the inclusion of the E-VA T Law in the coverage of the examination. The first notice given during the Chairman’s meeting with the Law Deans explicitly excludes the E -VAT Law from the coverage. The subsequent notice includes E-VAT Law but the reference to the ABAKADA Guro case gave many bar review lecturers in Taxation the impression that only the said case is included and not the entire EVAT Law, as it has been excluded for several years now. For the above reason, it is respectfully recommended that any answer be given credit. (BAR 2006) 2. Colawin Marketing Corp. (CMC) sells goods and renders services to Pinatubo Inc., a contractor for the U.S. Base. CMC applies for zero rate. Is it qualified for zero rating under the pertinent Tax Code provisions on VAT?  ANSWER: CMC is not qualified for zero rating. The goods and services rendered to Pinatubo, Inc.. evidently a domestic corporation, cannot be considered as an export sale. Pinatubo Inc. is but a contractor for the U.S. Base. The sales which are subject to zero percent are export sales and sales to persons or entities whose exemption under special laws or by an International Agreement where the Philippines is a signatory effectively subjects such sales to zero rate (Sec. 100, NIRC). (BAR 1991)

10. Transactions deemed sale

1. Under the Value Added tax (VAT), the tax is imposed on sales, barter, or exchange of goods and services. The VAT is also imposed on certain transactions "deemed-sales". What are these s o-called transactions "deemed sales'?  ANSWER: The following transactions shall be deemed sale: a) Transfer, use. or consumption not in the course of business of goods originally intended for sale or for use in the course of business: b) Distribution or transfer to: (1) Shareholders or investors as share in the profits of VAT-registered persons: or (2) Creditors in payment of debt: Page | 156

c) Consignment of goods if actual sale is not made within 60 days following the date such goods were consigned: and d) Retirement from or cessation of business, with respect to inventories of taxable goods existing as of such retirement or cessation. (BAR 1997) a. Transfer, use or consumption not in the course of business of goods/properties originally intended for sale or use in the course of business b.Distribution or transfer to shareholders, investors or creditors c. Consignment of goods if actual sale not made within 60 days from date of consignment d.Retirement from or cessation of business with respect to inventories on hand 11. Change or cessation of status as VAT-registered person a. Subject to VAT (1) Change of business activity from VAT taxable status to VAT-exempt status (2) Approval of request for cancellation of a registration due to reversion to exempt status (3) Approval of request for cancellation of registration due to desire to revert to exempt status after lapse of 3 consecutive years b.Not subject to VAT (1) Change of control of a corporation 1. Cebu Development Inc. (CDI) has an authorized capital stock of P5,000,000,00 divided into 50,000 shares with a par value of One Hundred Pesos (P100.00) per share. Of the authorized capital stock, twenty-five thousand (25,000) shares have been subscribed. Mr. Juan Legaspi is a stockholder of CDI where he has subscription amounting to 13,000 shares. To fully pay his unpaid subscription in the amount of P950.000.00, Mr. Legaspi transferred to the corporation a parcel of land that he owns by virtue of a Deed of Assignment. Upon investigation, the BIR discovered that Mr. Legaspi acquired said property for only P500,000.00. Is Mr. Legaspi liable for any taxable gain?  ANSWER: The transfer by Mr. Legaspi to the corporation of the parcel of land in payment of his unpaid subscription did not increase his stockholdings in the corporation. It cannot be said that he acquired control of the corporation by virtue of the transfer of the land. His percentage of stockholdings in the capital stock of the corporation remains the same after the transfer as before. Therefore, Mr. Legaspi derived taxable gain for his economic gain which was realized by virtue of the exchange of the land for the liability for the subscription.  ALTERNATIVE ANSWER: Mr. Legaspi is not liable for any taxable gain. The transaction amounted to an exchange of shares of property for shares of stock as a result of which the property transferor acquired control of the corporation. The 13,000 shares of stock acquired in exchange of property was more than fifty percent (50%) of the total subscribed capital stock of Cebu Development, Inc. (CDI) that qualified the transaction as a tax-exempt under the provisions of Sec. 34 (c) (2) of the National Internal Revenue Code. (BAR 1991) (2) Change in the trade or corporate name (3) Merger or consolidation of corporations 12. VAT on importation of goods 1. JKL Corporation is a domestic corporation engaged in the importation and sale of motor vehicles in the Philippines and is duly registered with the Subic Bay Metropolitan Authority (SBMA). In December 2007, it imported several second-hand motor vehicles from Japan and Korea, which it Page | 157

stores in a warehouse in Subic Bay. It sold these motor vehicles in April 2008, to persons residing in the customs territory. b) If they are taxable, upon sale to custom territory, when must the duties and taxes be paid? What are the bases for and purposes of computing customs duties and VAT? To whom must the duties and VAT be paid? Explain. (3%) SUGGESTED ANSWER: b) When these motor vehicles are sold to the customs territory, the duties and taxes must be paid before they are physically brought out of the Freeport Zone. The introduction of the motor vehicles to the customs territory is considered as technical importation subject to the customs duties and VAT. The tax base for the customs duties is the transaction value while for VAT purposes, the tax base is the value used in computing customs duties plus customs duties, excise taxes and other charges incident to importation. (Section 107 (A), NIRC). These taxes on importation must be paid to the Bureau of Customs before the Authority to Release Imported Goods will be issued by the BIR. (Revenue Regulations No. 16-2005). (BAR 2008)

a. Transfer of goods by tax exempt persons 1.  An alien employee of the Asian Development Bank (ADB) who is retiring soon has offered to sell his car to you which he imported tax-free for his personal use. The privilege of exemption from tax is granted to qualified personal use under the ADB Charter which is recognized by the tax authorities. If you decide to purchase the car, is the sale subject to tax? Explain. (5%) SUGGESTED ANSWER: Yes. The sale is subject to tax. Section 107 (B) of the NIRC provides that: "In the case of tax-free importation of goods into the Philippines by persons, entities or agencies exempt from tax where such goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be considered the importer thereof, who shall be liable for any internal revenue tax on such importation”. Note: The question seems to be outside the coverage of the bar examination because it involves an application of the provision of the VAT Law. It is suggested, therefore, that any answer shall be given full credit. (BAR 2005) 13. VAT on sale of service and use or lease of properties

1. Greenhills Condominium Corporation incorporated in 2001 is a non-stock, non-profit association of unit owners in Greenhills Tower, San Juan City. To be able to reduce the association dues being collected from the unit owners, the Board of Directors of the corporation agreed to lease part of the ground floor of the condominium building to DEF Savings Bank for P120,000 a month or P1.44 million for the year, starting January 2007. b) Will the association be liable for value added tax in 2008 if it increases the rental to PI50,000 a month beginning January 2008? Explain. (3%) SUGGESTED ANSWERS: b) Yes. When it increased the rentals to P150,000 per month, its gross annual receipts will now exceed PI.5 million. It is liable to the VAT beginning January 2008. (Section 109(V), NIRC). (BAR 2008)

a. Requisites for taxability Page | 158

14. Zero-rated sale of services

1.  Are the following transactions subject to VAT? If yes, what is the applicable rate for each transaction. State the relevant authority/ies for your answer. a. Construction by XYZ Construction Co. of concrete barriers for the Asian Development Bank in Ortigas Center to prevent car bombs from ramming the ADB gates along ADB Avenue in Mandaluyong City. (3%) SUGGESTED ANSWER: The transaction is subject to VAT at the rate of zero percent (0%). ADB is exempt from direct and indirect taxes under a special law, thereby making the sale of services to it by a VAT-registered construction company, effectively zero-rated (Sec. 108(B)(3), NIRC). b. Call Center operated by a domestic enterprise in Makati that handles exclusively the reservations of a hotel chain which are all located in North America. The services are paid for in US$ and duly accounted for with the Bangko Sentral ng Pilipinas. (3%) SUGGESTED ANSWER: The sale of services is subject to VAT at zero percent (0%). Zero-rated sale of services includes services rendered to a person engaged in business outside the Philippines and the consideration is paid in acceptable foreign currency duly accounted for by the Bangko Sentral ng Pilipinas (Sec. 108(B)(2), NIRC). 2. State whether the following transactions are a) VAT Exempt, b) subject to VAT at 10%; or c) subject to VAT at 0%: Services rendered by Jake's Construction Company, a contractor to the World Health Organization in the renovation of its offices In Manila. [1%] SUGGESTED ANSWER: VAT at 0%. Since Jake's Construction Company has rendered services to the World Health Organization, which is an entity exempted from taxation under international agreements to which the Philippines is a signatory, the supply of services is subject to zero percent (0%) rate. (Sec. 108IB](3), NIRC). (BAR 1998)

15. VAT exempt transactions

a. VAT exempt transactions, in general b.Exempt transaction, enumerated

1. Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he owns. The monthly rental for each unit ranges from P8,000.00 to PI0,000.00. His gross rental income for one year is PI,650,000.00. He consults you on whether it is necessary for him to register as a VAT taxpayer. What legal advice will you give him, and why? (4%) SUGGESTED ANSWER: I will advise Emiliano ttyat he is not required to register as a VAT taxpayer. His transactions of leasing residential units for an amount not exceeding P10,000.00 per unit per month are exempt from VAT irrespective of the aggregate amount of rentals received annually (Section 109(1X0,b NIRC). (BAR 2009) 2. Greenhills Condominium Corporation incorporated in 2001 is a non-stock, non-profit association of unit owners in Greenhills Tower, San Juan City. To be able to reduce the association dues being collected from the unit owners, the Board of Directors of the corporation agreed to lease part of Page | 159

the ground floor of the condominium building to DEF Savings Bank for P120,000 a month or P1.44 million for the year, starting January 2007. a) Is the non-stock, non-profit association liable for value added tax in 2007? If your answer is in the negative, is it liable for another kind of business tax? (4%) SUGGESTED ANSWER: a) No. Since the association’s annual gross receipts do not exceed PI.5 million, it is exempt from the VAT. (Section 109(V), NIRC). It is, however, liable to the 3% percentage tax which is the imposed on persons exempt from value-added tax on account of failure to reach the P1.5 million treshhold. (Section 116, NIRC). b) Will the association be liable for value added tax in 2008 if it increases the rental to PI50,000 a month beginning January 2008? Explain. (3%) SUGGESTED ANSWERS: b) Yes. When it increased the rentals to P150,000 per month, its gross annual receipts will now exceed PI.5 million. It is liable to the VAT beginning January 2008. (Section 109(V), NIRC). (BAR 2008) 3. State whether the following transactions are a) VAT Exempt, b) subject to VAT at 10%; or c) subject to VAT at 0%: Sale of fresh vegetables by Aling Ining at the Pamilihang Bayan ng Trece Martirez. [1%] SUGGESTED ANSWER: VAT exempt. Sale of agricultural products, such as fresh vegetables, in their original state, of a kind generally used as, or producing foods for human consumption is exempt from VAT. (Section 109(c), NIRC). (BAR 1998) 4. State whether the following transactions are a) VAT Exempt, b) subject to VAT at 10%; or c) subject to VAT at 0%: Fees for lodging paid by students to Bahay-Bahayan Dormitory, a private entity operating a student dormitory (monthly fee. P1,500). 11%] SUGGESTED ANSWER: VAT Exempt. The monthly fee paid by each student falls under the lease of residential units with a monthly rental per unit not exceeding Php8,000, which is exempt from VAT regardless of the amount of aggregate rentals received by the lessor during the year. (Sec. 109 (x), NIRC). The term unit shall mean per person in the case of dormitories, boarding houses and bed spaces (Sec. 4.103-1, RR No. 7-95). (BAR 1998) 5. Give at least three (3) real estate transactions which are not subject to the Value-Added Tax.  ANSWER: Real estate transactions which are exempt from the value-added tax are: a. Sale of real property not primarily held for sale or lease In the ordinary course of trade or business; b. Sale of real property utilized for socialized housing under RA. No. 7279; c. Sale of real property utilized under the low-cost housing under BP Big. 220. Note: The other real estate transactions which are exempt from the value-added tax which may be cited by the bar candidates are as follows: Page | 160

a. Transfer of real property to a trustee if the property is to be held merely in trust for the trustor. b. Transfer of real property to a corporation in exchange for its shares of stock under Section 34(c)(2) and (6)(2) of the Tax Code. c. Advance payment by the lessee in a lease contract, when the same is actually a loan to the lessor from the lessee. d. Security deposits for lease arrangements to insure the faithful performance of certain obligations of the lessee to the lessor. e. Lease of residential units, boarding houses, dormitories, rooms and bed spaces offered for rent by their owners at a monthly rental not exceeding P3.950.00 per unit. (BAR 1996)

16. Input tax and output tax, defined 17. Sources of input tax

18. 19.

20. 21.

22.

23. 24.

a. Purchase or importation of goods b.Purchase of real properties for which a VAT has actually been paid c. Purchase of services in which VAT has actually been paid d.Transactions deemed sale e. Presumptive input f. Transitional input Persons who can avail of input tax credit Determination of output/input tax; VAT payable; excess input tax credits a. Determination of output tax b.Determination of input tax creditable c. Allocation of input tax on mixed transactions d.Determination of the output tax and VAT payable and computation of VAT payable or excess tax credits Substantiation of input tax credits Refund or tax credit of excess input tax a. Who may claim for refund/apply for issuance of tax credit certificate b.Period to file claim/apply for issuance of tax credit certificate c. Manner of giving refund d.Destination principle or cross-border doctrine Invoicing requirements a. Invoicing requirements in general b.Invoicing and recording deemed sale transactions c. Consequences of issuing erroneous VAT invoice or VAT official receipt Filing of return and payment Withholding of final VAT on sales to government

E. Tax remedies under the NIRC 1. Taxpayer’s remedies 1. Describe separately the procedures on the legal remedies under the Tax Code available to an aggrieved taxpayer both at the administrative and judicial levels. (5%) SUGGESTED ANSWER: The legal remedies of an aggrieved taxpayer under the Tax Code, both at the administrative and judicial levels, may be classified into those for assessment, collection and refund. The procedures for the administrative remedies for assessment are as follows:

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a. After receipt of the Pre-Assessment Notice, he must within fifteen (15) days from receipt explain why no additional taxes should be assessed against him. b. If the Commissioner of Internal Revenue Issues an assessment notice, the taxpayer must administratively protest or dispute the assessment by filing a motion for reconsideration or reinvestigation within thirty (30) days from receipt of the notice of assessment. (4th par., Sec. 228, NIRC of 1997) Within sixty (60) days from filing of the protest, the taxpayer shall submit all relevant supporting documents. The judicial remedies of an aggrieved taxpayer relative to an assessment notice are as follows: a. Where the Commissioner of Internal Revenue has not acted on the taxpayer’s protest within a period of one hundred eighty (180) days from submission of all relevant documents, then the taxpayer has a period of thirty (30) days from the lapse of said 180 days within which to interpose a petition for review with the Court of Tax Appeals. b. Should the Commissioner deny the taxpayer's protest, then he has a period of thirty (30) days from receipt of said denial within which to interpose a petition for review with the Court of Tax Appeals. In both cases the taxpayer must apply with the Court of Tax Appeals for the issuance of an injunctive writ to enjoin the Bureau of Internal Revenue from collecting the disputed tax during the pendency of the proceedings. The adverse decision of the Court of Tax Appeals is appealable to the Court of Appeals by means of a petition for certiorari within a period of fifteen (15) days from receipt of the adverse decision, extendible for another period of fifteen (15) days for compelling reasons, but the extension is not to exceed a total of thirty (30) days in all. The adverse decision of the Court of Appeals is appealable to the Supreme Court by means of a petition for review on certiorari within a period of fifteen (15) days from receipt of the adverse decision of the Court of Appeals. The employment by the Bureau of Internal Revenue of any of the administrative remedies for the collection of the tax like distraint, levy, etc. may be administratively appealed by the taxpayer to the Commissioner whose decision is appealable to the Court of Tax Appeals under other matter arising under the provisions of the National Internal Revenue Code. The judicial appeal starts with the Court of Tax Appeals, and continues in the same manner as shown above. Should the Bureau of Internal Revenue decide to utilize Its judicial tax remedies for collecting the taxes by means of an ordinary suit filed with the regular courts for the collection of a sum of money, the taxpayer could oppose the same going up the ladder of judicial processes from the Municipal Trial Court (as the case may be) to the Regional Trial Court, to the Court of Appeals, thence to the Supreme Court. The remedy of an aggrieved taxpayer on a claim for refund is to appeal the adverse decision of the Commissioner to the CTA in the same manner outlined above. (BAR 2000) 2. What are the legal remedies of an aggrieved taxpayer both at the administrative and judicial levels? Describe separately the procedures.  ANSWER: a) The administrative and judicial remedies are such as may be provided for in law imposing the tax. An expression of such remedies in the law should then be deemed exclusive by the taxpayer. When the law imposing the tax is silent on remedies, the laws and rules of procedure of general application shall Page | 162

then govern. b) Under the NIRC, an aggrieved taxpayer may either (1) dispute an assessment within thirty (30) days

from receipt thereof by filing with the Commissioner of Internal Revenue a request for reconsideration of reinvestigation, or (2) pay the assessment within the thirty days then file a written claim with the Commissioner of Internal Revenue for refund within two years from full and final payment. Upon an adverse decision of the Commissioner and within thirty days from receipt of notice of denial, an appeal may be filed with the Court of Tax Appeals. However, with respect to claims for refunds, an appeal must also be filed within two years from the date of full and final payment. From the decision of the Court of Tax Appeals, an appeal or petition for review by certiorari may be taken to the Court of Appeals and then to the Supreme Court in appropriate cases. (BAR 1992) a. Assessment (1) Concept of assessment 1.  After examining the books and records of EDS Corporation, the 2004 final assessment notice, showing basic tax of PI ,000,000., deficiency interest of P400,000, and due date for payment of  April 30, 2007 but without the demand letter, was mailed and released by the BIR on April 15, 2007. The registered letter, containing the tax assessment, was received by the EDS Corporation on  April 25, 2007. a) What is an assessment notice? SUGGESTED ANSWER: a) An assessment notice is a formal notice to the taxpayer stating that the amount thereon is due as a tax and containing a demand for the payment thereof. {Alhambra Cigar and Cigarette Mfg. Co.v. Collector, 10S PR 1337[1959]; CIR v. Pascor Realty and Development Corp., 309 SCRA 402 [1999]). To be valid, the taxpayer must be informed in writing of the law and the facts on which the assessment is made. (Section 228, NIRC). (BAR 2008) 2. Distinguish between a taxpayer’s remedies in con nection with his tax assessment and/or demand and his claim for refund of taxes alleged to have been erroneously or illegally collected.  ANSWER: A tax assessment becomes final unless it is disputed or contested within 30 days from receipt thereof by the taxpayer. If the action taken by the Commissioner on the request for reconsideration is unacceptable to the taxpayer, the latter must then appeal, by way of Petition for Review to the Court of Tax Appeals within thirty days from receipt of the decision of the Commissioner of Internal Revenue. The taxpayer may also opt to pay the tax before the finality of the assessment (e.g., within 30 days from receipt of the assessment) and then file within two years a written claim for the refund of the tax. A denial by the Commissioner of a claim for refund must be appealed to the CTA within thirty days from receipt of notice of denial and within two years from the day of full and final payment. Continued inaction by the Commissioner on claims for refund may thus be taken as a denial appealable to the Court of Tax Appeals, in order to permit the appeal to be considered or having been made within the two-year mandatory period. (BAR 1992) (i) Requisites for valid assessment

1.  After examining the books and records of EDS Corporation, the 2004 final assessment notice, showing basic tax of PI ,000,000., deficiency interest of P400,000, and due date for payment of  April 30, 2007 but without the demand letter, was mailed and released by the BIR on April 15, Page | 163

2007. The registered letter, containing the tax assessment, was received by the EDS Corporation on  April 25, 2007. a) What are the requisites of a valid assessment? Explain. (3%) SUGGESTED ANSWER: a) An assessment is a written notice and demand made by the Bureau on the taxpayer for the settlement of a tax liability that is due, definitely set and fixed therein. The requisites of a valid assessment are: 1.

It must be made within the prescriptive period to assess; (Section 203, NIRC)

2.

There must be a preliminary assessment previously issued, except in those instances allowed by law; (Section 228, NIRC)

3.

The taxpayer must be informed in writing about the law and facts on which the assessment is based; (Section 228, NIRC) and

4.

It must be served upon the taxpayer or any of his authorized representatives. (Estate of Juliana Diez vda. De Gabriel v. CIR, 421 SCRA 266[2004]).

b) As tax lawyer of EDS Corporation, what legal defense(s) would you raise against the assessment? Explain. (3%) SUGGESTED ANSWER: b) I will question the validity of the assessment because of the failure to send the demand letter which contains a statement of the law and the facts upon which the assessment is based. If an assessment notice is sent without informing the taxpayer in writing about the law and facts on which the assessment is made, the assessment is void. (Section 228, NIRC; Azucena T. Reyes v. CIR, 480 SCRA 382 [2006]). (BAR 2008) (ii) (iii) (iv) (v)

Constructive methods of income determination Inventory method for income determination Jeopardy assessment Tax delinquency and tax deficiency

1. Is a deficiency tax assessment a bar to a claim for tax refund or tax credit? Explain. SUGGESTED ANSWER: No. As a general rule, a deficiency tax assessment is not a bar to a claim for tax refund or tax credit. It is logically appropriate; however, that if the deficiency tax assessment is already final, the Commissioner should not grant the claim unless the taxpayer pays the deficiency. Likewise, no tax refund or tax credit will be granted as long as there is pending a deficiency tax assessment for the same taxable period. To award a tax refund or tax credit despite the existence of deficiency assessment for the same taxable period is an absurdity and a polarity in conceptual effects. A taxpayer cannot be entitled to a refund and at the same time be liable for a tax deficiency assessment. In order to avoid multiplicity of suits, it is logically necessary and legally appropriate that the issue of deficiency tax assessment be resolved jointly with the taxpayer’s claim for tax refund, to determine once and for all in a single proceeding the true and correct amount of tax due or refundable. [CIR v. CA, City trust Banking Corp. and CTA, 234 SCRA 348 (1994)]. (BAR 2005) 2. Danilo, 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. The accountant filed a falsified tax return by underdeclaring the sales and overstating the expense deductions by Danilo. Page | 164

Is Danilo liable for the deficiency tax and the penalties thereon? What is the liability, if any, of the accountant? Discuss. (5%) SUGGESTED ANSWER: Yes, Danilo is liable for the deficiency tax as well as for the deficiency interest. However, he is not liable to the fraud penalty because the accountant acted beyond the limits of his authority. A tax return which does not correctly reflect taxable income may only be false but not necessarily fraudulent where it appears that the return was not prepared by the taxpayer himself but by his accountant. Accordingly, the 50% surcharge for fraud could not be imposed. [Aznar v. CTA, 58 SCRA 719, (1 974)]. On the other hand, the accountant may be held criminally liable for violation of the Tax Code when he falsified the tax return by underdeclaring the sale and overstating the expense deductions. (Sec. 257, NIRC). If Danny's accountant is a Certified Public Accountant, his certificate as CPA shall automatically be revoked or cancelled upon conviction. (BAR 2005) 3. When is a revenue tax considered delinquent? [3%I What constitutes prima facie evidence of a false or fraudulent return? [2%] SUGGESTED ANSWER: A revenue tax is considered delinquent when it is unpaid after the lapse of the last day prescribed by law for its payment. Likewise, it could also be considered as delinquent where an assessment for deficiency tax has become final and the taxpayer has not paid it within the period given in the notice of assessment. (BAR 1998) 4. Mr. Lajojo is a big-time swindler. In one year he was able to earn PI Million from his swindling activities. When the Commissioner of Internal Revenue discovered his income from swindling, the Commissioner assessed him a deficiency income tax for such income. The lawyer of Mr. Lajojo protested the assessment on the following grounds: If he has to pay the deficiency income tax assessment, there will be hardly anything left to return to the victims of the swindling. How will you rule on each of the three grounds for the protest? Explain.  ANSWER: The deficiency 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 subjected to the tax. Mr. Lajojo’s liability to pay the tax is based on his having realized a taxable income from hi s swindling activities and will not affect his obligation to make restitution. Payment of the tax is a civil obligation imposed by law while restitution is a civil liability arising from a crime. (BAR 1995) 5. Businessman Stephen Yang filed an Income tax return for 1993 showing business net income of P350.000.00 on which he paid an income tax of P61,000.00. After filing the return he realized that he forgot to include an item of business income in 1993 for P50.000.00. Being an honest taxpayer, he included this income in his return for 1994 and paid the corresponding income tax thereon. In the examination of his 1993 return the BIR examiner found that Stephen Yang failed to report this item of P50.000.00 and assessed him a deficiency income tax on this item, plus a 50% fraud surcharge. 1) Is the examiner correct? Explain.

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2) If you were the lawyer of Stephen Yang, what would you have advised your client before he included in his 1994 return the amount of P50.000.00 as 1993 income to avoid the fraud surcharge? Explain. 3) Considering that Stephen Yang had already been assessed a deficiency income tax for 1993 for his failure to report the P50,000.00 income, what would you advise him to do to avoid the penalties for tax delinquency? Explain. 4) What would you advise Stephen Yang to do with regard to the income tax he paid for the P50,000.00 in his 1994 return? In case your remedy fails, what is your other recourse? Explain.  ANSWER: 1) The examiner is correct in assessing a deficiency income tax for taxable year 1993 but not in imposing the 50% fraud surcharge. The amount of all items of gross income must be included in gross income during the year in which received or realized (Sec. 38, NIRC). The 50% fraud surcharge attaches only if a false or fraudulent return is willfully made by Mr. Yang (Sec.248.NIRC). The fact that Mr. Yang included the income in his 1994 return belies any claim of willfulness but is rather indicative of an honest mistake which was sought to be rectified by a subsequent act that is the filing of the 1994 return. 2) Mr. Yang should have amended his 1993 Income tax return to allow for the inclusion of the P50.000 income during the taxable period it was realized. 3) Mr. Yang should pay the deficiency income tax on or before the day prescribed for its payment per notice of demand. After payment and within two years thereafter, he should file a claim for refund of taxes erroneously paid to recover the excessive surcharge imposed.

4) Mr. Yang should file a protest questioning the 50% surcharge and ask for the abatement thereof.  ALTERNATIVE ANSWER: 4) Mr. Yang should file a written claim for refund with the Commissioner of Internal Revenue of the taxes paid on the P50.000 income included in 1994 within two years from payment pursuant to Section 204(3) of the Tax Code. Should this remedy fail in the administrative level, a judicial claim for refund can be instituted before the expiration of the two year period. (BAR 1995) 6. Do you think an action for mandamus with the RTC can prosper to compel the Commissioner to issue a deficiency assessment?  ANSWER: No. It has been held that the assessment of taxes is not a ministerial duty compellable by mandamus. It is a discretionary power vested by law on the Commissioner of Internal Revenue in the exercise of which the regular courts may not interfere with. (BAR 1992) (2) Power of the Commissioner to make assessments and prescribe additional requirements for tax administration and enforcement (i) Power of the Commissioner to obtain information, and to summon/examine, and take testimony of persons 1. X dies in year 2000 leaving a bank deposit of P2, 000,000.00 under joint account with his associates in a law office. Learning of X’s death from the newspapers, the Commissioner of Internal Revenue wrote to every bank in the country asking them to disclose to him the amount of deposits that might be outstanding in his name or jointly with others at the date of his death. May the bank holding the deposit refuse to comply on the ground of the Secrecy of Bank Deposit Law? Explain. Page | 166

SUGGESTED ANSWER: No. The Commissioner of Internal Revenue has the authority to inquire into bank deposit accounts of a decedent to determine his gross estate notwithstanding the provisions of the Bank Secrecy Law. Hence, the banks holding the deposits in question may not refuse to disclose the amount of deposits on the ground of secrecy of bank deposits. (Section 6(F) of the 1997 Tax Code). The fact that the deposit is a joint account will not preclude the Commissioner from inquiring thereon because the law mandates that if a bank has knowledge of the death-of a person, who maintained a bank deposit account alone, or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner has certified that the taxes imposed thereon have been paid. (Section 97 of the 1997 Tax Code). Hence, to be able to give the required certification, the inclusion of the deposit is imperative, which may be made possible only through the inquiry made by the Commissioner. (BAR 2003) 2.  A taxpayer is suspected not to have declared his correct gross income in his return filed for 1997. The examiner requested the Commissioner to authorize him to inquire into the bank deposits of the taxpayer so that he could proceed with the net worth method of investigation to establish fraud. May the examiner be allowed to look into the taxpayer’s bank deposits? In what cases may the Commissioner or his duly authorized representative be allowed to Inquire or look into the bank deposits of a taxpayer? (5%) SUGGESTED ANSWER: No, as this would be violative of Republic Act No. 1405, the Bank Deposits Secrecy Law. The Commissioner of Internal Revenue or his duly authorized representative may be allowed to inquire or look into the bank deposits of a taxpayer in the following cases: a) For the purpose of determining the gross estate of a decedent; b) Where the taxpayer has filed an application for compromise of his tax liability by reason of financial incapacity to pay such tax liability. [Sec. 6 (F), NIRC of 1997] c) Where the taxpayer has signed a waiver authorizing the Commissioner or his duly authorized representatives to inquire into the bank deposits. (BAR 2000) 3.  A Co., a Philippine corporation, is a big manufacturer of consumer goods and has several suppliers of raw materials. The BIR suspects that some of the suppliers are not properly reporting their income on their sales to A Co. The CIR therefore: 1. Issued an access letter to A Co. to furnish the BIR information on sales and payments to its suppliers. 2. Issued an access letter to a bank (CX Bank) to furnish the BIR on deposits of some suppliers of A Co. on the alleged ground that the suppliers are committing tax evasion.  A Co., X Bank and the suppliers have not been issued by the BIR letter of authority to examine. A Co. and X Bank believe that the BIR is on a “fishing expedition" and come to you for counsel. What is your advice? (10%) SUGGESTED ANSWER: I will advise A Co. and B Co. that the BER is justified only in getting information from the former but not from the latter. The BIR is authorized to obtain information from other persons other than those whose internal revenue tax liability is subject to audit or investigation. However, this power shall not be construed as granting the Commissioner the authority to inquire into bank deposits. (Section 5, NIRC). (BAR 1999)

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4. Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayer? If so, does this power of the Commissioner conflict with FLA. 1405 (Secrecy of Bank Deposits Law) [5%] SUGGESTED ANSWER: The Commissioner of Internal Revenue is authorized to inquire into the bank deposits of: (1) a decedent to determine his gross estate; (2) any taxpayer who has filed an application for compromise of his tax liability by means of financial Incapacity to pay his tax liability (Sec. 6(F), NIRC). The limited power of the Commissioner does not conflict with R.A. No. 1405 because the provisions of the Tax Code granting this power is an exception to the Secrecy of Bank Deposits Law as embodied in a later legislation. Furthermore, in case a taxpayer applies for an application to compromise the payment of his tax liabilities on his claim that his financial position 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 R.A. No. 1405, and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the taxpayer. (BAR 1998) (3) When assessment is made (i) Prescriptive period for assessment 1. The Commissioner of Internal Revenue issued an assessment for deficiency income tax for taxable year 2000 last July 31, 2006 in the amount of P10 Million inclusive of surcharge and interests. If the delinquent taxpayer is your client, what steps will you take? What is your defense? 10% SUGGESTED ANSWER: Since my client has already lost his right to protest the assessment having been issued on July 31, 2006 and that he is already categorized as a delinquent tax payer. I will advise him to wait for a collection action to be instituted by the commissioner. Once colletion is pursued. I will file a petition for review with the CTA to question the validity of the commissioner’s action. My defense would be prescription. Since the assessment was issued beyond the prescriptive period to assess, the assessment is invalid and any action to collect an invalid assessment is not warranted (Phil. Journalists, Inc. v. CIR, 447 SCRA 214 [2004])  ANOTHER SUGGESTED ANSWER: I will advise my client, who is a delinquent taxpayer, to file a request with the Commissioner of Internal Revenue for the abatement of the entire assessment on the ground that the same is unjustly assessed (Sec, 204, NIRC), I will invoke prescription as a defense against the assessment. I will tell the Commissioner that the assessment having been issued beyond the prescriptive period, the deficiency income tax would appear to be unjustly assessed which would justify the abatement or cancellation of the entire assessment.  ANOTHER SUGGESTED ANSWER: I will immediately file a protest within thirty (30) days from receipt of the assessment by my client addressed to the Commissioner of Internal Revenue, alleging prescription as my defense because the assessment was issued beyond three (3) years as required by law (Sec. 228 and 203, NIRC). Should the Commissioner deny my protest, I will file an appeal to the Court of Tax Appeals (CTA) within thirty (30) days from receipt of the decision (Sec. 228, NIRC). Should the CTA Division deny my petition for review, I will file a Motion for Reconsideration within 15 days from receipt of the denial. Should the Division deny my Motion for Reconsideration, I will appeal to the CTA en banc and from the latter’s denial, I will appeal to the Supreme Court by way of a petition for certiorari within 15 days from receipt of the en banc decision. (BAR 2006) Page | 168

2. Mr. Sebastian is a Filipino seaman employed by a Norwegian company which is engaged exclusively in international shipping. He and his wife, who manages their business, filed a joint income tax return for 1997 on March 15.1998. After an audit of the return, the BIR issued on April 20, 2001 a deficiency income tax assessment for the sum of P250,000.00, inclusive of interest and penalty. For failure of Mr. and Mrs. Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued on August 19,2001 warrants of distraint and levy to enforce collection of the tax. Decide Mr. Castro’s protest. (2%)

SUGGESTED ANSWER: The protest should be resolved against Mr. Castro. What was filed is a fraudulent return making the prescriptive period for assessment ten (10) years from discovery of the fraud (Section 222, NIRC). Accordingly, the assessment was issued within the prescriptive period to make an assessment based on a fraudulent return. If you are the lawyer of Mr. and Mrs. Sebastian, what possible defense or defenses will you raise in behalf of your clients against the action of the BIR in enforcing collection of the tax by the summary remedies of warrants of distraint and levy? Explain your answer. (3%) SUGGESTED ANSWER: I will raise the defense of prescription. The right of the BIR to assess prescribes after three years counted from the last day prescribed by law for the filing of the income tax returns when the said return is filed on time. (Section 203, NIRC). The last day for filing the 1997 income tax return is April 15,1998. Since the assessment was issued only on April 20, 2001, the BIR’s right to assess has already prescribed. (BAR 2002) 3.  A Co., a Philippine Corporation, filed its 1995 Income Tax Return (ITR) on April 15, 1996, showing a net loss. On November 10. 1996, it amended its 1995 ITR to show more losses. After a tax investigation, the BIR disallowed certain deductions claimed by A Co., putting A Co. in a net income position. As a result, on August 5, 1999, the BIR issued a deficiency income assessment against A Co. A Co. protested the assessment on the ground that it has prescribed: Decide. (5%) SUGGESTED ANSWER: The right of the BIR to assess the tax has not prescribed. The rule is that internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return. (Section 203, NIRC). However, if the return originally filed is amended substantially, the counting of the three-year period starts from the date the amended return was filed. (CIR v. Phoenix Assurance Co., Ltd., 14 SCRA 52). There is a substantial amendment in this case because a new return was filed declaring more losses, which can only be done either (1) in reducing gross income or (2) in increasing the items of deductions, claimed. (BAR 1999) 4. Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules that have been adopted on this score by – (a) The National Internal Revenue Code; SUGGESTED ANSWER: The rules that have been adopted on prescription are as follows: (a) National Internal Revenue Code - The statute of limitation for assessment of tax if a return is filed is within three (3) years from the last day prescribed by law for the filing of the return or if filed after the last day, within three years from date of actual filing. If no return is filed or the return Page | 169

filed is false or fraudulent, the period to assess is within ten years from discovery of the omission, fraud or falsity. (BAR 1997) 5. On September 19, 1973, the BIR sent a notice of assessment to X to pay P300.000.00 as forest charges for the year 1970-73. Xmade a partial payment of P100.000.00 on September 28,1973. X died in November, 1977. On July 29, 1979, the BIR filed in the Testate Estate Proceedings of X a claim for P200.000.00the unpaid forest charges left by X. the administrator of the estate opposed the claim on the ground of prescription. Decide.  ANSWER: Where assessment was made, the tax may be collected within five (5) years (now 3 years) from the date of assessment [Coflection of Internal Revenue v. Pineda, 2 SCRA 401; Umali, Roman A., Reviewer in Taxation, 1985. pp. 486-487; Vitug, JoseC., Compendium of Tax Law and Jurisprudence, 2nd Rev., Ed.. 1986, p. 255). In the case at bar, X on the basis of the notice of assessment, voluntarily made a partial payment to the Bureau of Internal Revenue in the amount of One Hundred Thousand Pesos (P100,000.00). However, it took the BIR almost more than five (5) years to take the necessary legal action to collect the remaining amount of taxes due. This is clearly beyond the five (5) now three (3) year period for the collection of taxes. Hence, the claim filed by the BIR against the Estate of X for the payment of Two Hundred Thousand Pesos (P200.000.00) has prescribed.  ALTERNATIVE ANSWERS: a) The claim has prescribed as the BIR has only three (3) years from the date of the assessment to collect. b) Taxes are money claims that must be filed with the probate court within the period provided for in the

Rules of Court (Sections 1 and 2. Rule 86). In the case of Domingo v. Garlttos (8 SCRA 443), the court ruled that the claims shall be barred if filed beyond the prescribed period Just like any other money claims. But the ruling in Garlitos was superseded by Vera v. Fernandez which ruled that estate taxes are payable even if presented beyond the period in the statute of non-claims in the Rules of Court. (BAR 1993) a) False, fraudulent, and non-filing of returns 1.  A false return and a fraudulent return are one and the same. SUGGESTED ANSWER: False. There is a difference between a false return and a fraudulent return. The first merely implies a deviation from the truth or fact whether intentional or not, whereas the second is intentional and deceitful with the aim of evading the correct tax due (Aznar v. Commissioner, GR No. L-20569, August 23, 1974, 58 SCRA S19[1974]). (BAR 2009) 2. What constitutes prima facie evidence of a false or fraudulent return to justify the imposition of a 50% surcharge on the deficiency tax due from a taxpayer? Explain. (5%) SUGGESTED ANSWER: There is a prima facie evidence of false or fraudulent return when the taxpayer substantially underdeclared his taxable sales, receipts or income, or substantially overstated his deductions, the taxpayer’s failure to report sales, receipts or income in an amount exceeding 30% of that declared per return, and a claim of deduction in an amount exceeding 30% of actual deduction shall render the taxpayer liable for substantial underdeclaration and overdeclaration, respectively, and will justify the imposition of the 50% surcharge on the deficiency tax due from the taxpayer. (Sec. 248, NIRC). (BAR 2002) Page | 170

3. What constitutes prima facie evidence of a false or fraudulent return? [2%] SUGGESTED ANSWER: There is prima facie evidence of a false or fraudulent return when the taxpayer has wilfully and knowingly filed it with the intent to evade a part or all of the tax legally due from him (Ungab v. Cusi, 97 SCRA 877). There must appear a design to mislead or deceive on the part of the taxpayer, or at least culpable negligence. A mistake, not culpable in respect of its value would not constitute a false return. (Words and Phrases, Vol 16, page 173). (BAR 1998) 4. Distinguish a false return from a fraudulent return.  ANSWER: The distinction between a false return and a fraudulent return is that the first 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 [Aznar vs. Commissioner, L-20569. August 23, 1974).  ALTERNATIVE ANSWER: A false return contains deviations from the truth which may be due to mistakes, carelessness or ignorance of the person preparing the return. A fraudulent return contains an intentional wrongdoing with the sole object of avoiding the tax and it may consist in the intentional under declaration of income, intentional over declaration of deductions or the recurrence of both. A false return is not necessarily tainted with fraud because the fraud contemplated by law is actual and not constructive. Any deviation from the truth on the other hand, whether intentional or not, constitutes falsity. [Aznar vs. Commissioner, L-20569, August 23, 1974) (BAR 1996) (ii) Suspension of running of statute of limitations

1. What is the effect of the execution by a taxpayer of a “waiver of the statute of limitations” on his defense of prescription? (2%) SUGGESTED ANSWER: The waiver of the statute of limitation executed by a taxpayer is not a waiver of the right to invoke the defense of prescription. The waiver of the statute of limitation is merely an agreement in writing between the taxpayer and the BIR that the period to assess and collect taxes due is extended to a date certain. If prescription has already set in at the time of the execution of the waiver is invalid, the taxpayer can still raise prescription as a defense (Phil. Journalists Inc., v. CIR, GR No. 162852, Dec. 16, 2004) 2.  A Co., a Philippine Corporation, filed its 1995 Income Tax Return (ITR) on April 15, 1996, showing a net loss. On November 10. 1996, it amended its 1995 ITR to show more losses. After a tax investigation, the BIR disallowed certain deductions claimed by A Co., putting A Co. in a net income position. As a result, on August 5, 1999, the BIR issued a deficiency income assessment against A Co. A Co. protested the assessment on the ground that it has prescribed: Decide. (5%) SUGGESTED ANSWER: The right of the BIR to assess the tax has not prescribed. The rule is that internal revenue taxes shall be assessed within three years after the last day prescribed by law for the filing of the return. (Section 203, NIRC). However, if the return originally filed is amended substantially, the counting of the three-year period starts from the date the amended return was filed. (CIR v. Phoenix Assurance Co., Ltd., 14 SCRA 52). There is a substantial amendment in this case because a new return was filed declaring more losses, which can only be done either (1) in reducing gross income or (2) in increasing the items of deductions, claimed. (BAR 1999) 3.  Antonio Cruz was appointed by the Regional Trial Court as Administrator in the testate Page | 171

proceedings for the settlement of the estate of his deceased father. On 12 February 1987, the Commissioner of Internal Revenue issued a deficiency estate tax assessment for the estate in question in the amount of P2.816,514.60. The notice of deficiency assessment was received by the Administrator on 19 February 1987. In his letter to the Commissioner, dated 21 February 1987, which was received by the latter’s office two (2) days later, the Administrator requested for a reconsideration of the assessment on the ground that the same is contrary to law and is not supported by sufficient evidence. He also requested for a period of fifteen (15) days within which to submit the estate’s position paper. On 4 August 1988, not having received the promise position paper, the Commissioner filed with the Court a motion for allowance of claim and for an order of payment of estate taxes, praying therein that the administrator be directed to pay the BIR the aforementioned deficiency tax. The  Administrator opposed the motion alleging that by reasons of the pendency of his request for reconsideration, the deficiency assessment has not become final and executory and, therefore, the absence of a decision on the disputed' assessment is a bar against collection of taxes. He further argued that it is the Court of Tax Appeals, and not the Regional Trial Court, which has exclusive jurisdiction over the claim. Resolve the motion and issues raised.  ANSWER: Evidently, the request for reconsideration did not express or specify the grounds therefor. A request for reconsideration in the tenor stated in the problem is insufficient, not being substantiatied, to stop the running of the 30-day period within which the assessment may be disputed (Dayrit vs. Cruz, G.R No. 39919, 26 September 1988). The failure of the taxpayer to submit the promised position paper within the said 30-day period had the effect of rendering the assessment final and executory. In addition, the pendency of a decision on a disputed assessment does not bar the collection of the NIRC taxes, and no injunction maybe issued by any court (except by the Court of Tax Appeals as an incident to a timely petition for review). In the absence of a petition for review with the Court of Tax Appeals which may be brought by a taxpayer within thirty (30) days from the receipt of the final decision of the Commissioner, the Court of Tax Appeals has no jurisdiction to take cognizance thereof (See Sec. 11, RA. 1125). Premises considered, the action taken by the Commissioner with the Regional Trial Court was appropriate and in accordance with law.  ALTERNATIVE ANSWER: Once a request for reconsideration is made by the taxpayer on an assessment of the BIR within 30 days from receipt thereof, the Commissioner is bound to make a decision thereon. That decision is the one appealable to the Court of Tax Appeals. But if the taxpayer does not appeal within the 30-day period, the assessment becomes final and executory and demandable. The implication of this new provision in the NIRC is that the Commissioner cannot collect the tax as long as the taxpayer has still the right to appeal from the Commissioner’s action. (BAR 1991) (4) General provisions on additions to the tax (i) Civil penalties 1. What constitutes prima facie evidence of a false or fraudulent return to justify the imposition of a 50% surcharge on the deficiency tax due from a taxpayer? Explain. (5%) SUGGESTED ANSWER: There is a prima facie evidence of false or fraudulent return when the taxpayer substantially underdeclared his taxable sales, receipts or income, or substantially overstated his deductions, the taxpayer’s failure to report sales, receipts or income in an amount exceeding 30% of that declared per return, and a claim of deduction in an amount exceeding 30% of actual deduction shall render the taxpayer liable for substantial underdeclaration and overdeclaration, respectively, and will justify the Page | 172

imposition of the 50% surcharge on the deficiency tax due from the taxpayer. (Sec. 248, NIRC). (BAR 2002) (ii) Interest (iii) Compromise penalties

1.  A domestic corporation failed to withhold and remit the tax on income received from Philippine sources by a nonresident foreign corporation. In addition to the civil penalties provided for under the Tax Code, a compromise penalty was imposed for violation of the withholding tax provisions. May the Commissioner of Internal Revenue legally enforce the collection of compromise penalty? (5%) SUGGESTED ANSWER: No. There is no showing that the compromise penalty was imposed by the Commissioner of Internal Revenue with the agreement and conformity of the taxpayer. (Wonder Mechanical Engineering Corporation v. Court of Tax Appeals, et al. 64 SCRA 555). (BAR 2000) (5) Assessment process (i) Tax audit (ii) Notice of informal conference (iii) Issuance of preliminary assessment notice (iv) Notice of informal conference (v) Issuance of preliminary assessment notice (vi) Exceptions to issuance of preliminary assessment notice (vii) Reply to preliminary assessment notice (viii) Issuance of formal letter of demand and assessment notice/final assessment notice 1. Minolta Philippines, Inc. (Minolta) is an EPZA-registered enterprise enjoying preferential tax treatment under a special law. After investigation of its withholding tax returns for the taxable year 1997, the BIR issued a deficiency withholding tax assessment in the amount of P150,000.00. On May 15, 1999, because of financial difficulty, the deficiency tax remained unpaid, as a result of which the assessment became final and executory. The BIR also found that, in violation of the provisions of the National Internal Revenue Code, Minolta did not file its final corporate income tax return for the taxable year 1998, because it allegedly incurred net toss from its operations. On May 17, 2002, the BIR filed with the Regional Trial Court an action for collection of the deficiency withholding tax for 1997. Will the BIR’s action for collection prosper? As counsel of Minolta, what action will you take? Explain your answer. (5%)

SUGGESTED ANSWER: Yes, BIR’s action for collection will prosper because the assessment is already final and executory. It can already be enforced through judicial action. As counsel of Minolta, I will introduce evidence that the income payment was reported by the payee and the income tax was paid thereon in 1997 so that my client may only be allowed to pay the civil penalties for non-withholding pursuant to RMO No. 38-83. [Note: It 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] (BAR 2002)

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(ix) Disputed assessment

1. Which court acts on: disputed assessments?  ANSWER: The CTA exercises exclusive appellate Jurisdiction over disputed assessments. (BAR 1992) (x) Administrative decision on a disputed assessment

1. Pursuant to the National Internal Revenue Code and under existing rules and regulations, the Commissioner of Internal Revenue is clothed with the authority/power to evaluate facts of tax cases and issue assessments/demands against a taxpayer for deficiency taxes. If a KTC Judge, on motion of an informer, renders a decision ordering the Commissioner to assess and collect from the taxpayer certain deficiency taxes when, in fact, the BIR has already ascertained that no deficiency taxes are due the taxpayer, what proper course of action would you advise your informer-client to undertake?  ANSWER: The issue being disputed assessment, jurisdiction, if at all, lies with the Court of Tax Appeals and not with the RTC. The court decision, in my view, can be voided. I would simply advice my client to pursue the matter administratively. If the evidence warrants, I could have the matter investigated by the Ombudsman.  ALTERNATIVE ANSWER: I will advise the client to go to the BIR to file an information under oath so that it may consider any evidence my client may have in his possession. (BAR 1992)

(6) Protesting assessment (i) Protest of assessment by taxpayer a) Protested assessment b) When to file a protest 1. Since the taxpayer has opted to carry-over the PI million overpaid income tax for taxable year 2008, said option is considered irrevocable and no application for cash refund shall be allowed for it (Sec. 76, NIRC; CIR v. Bank of Philippine Island, G.R. No. 178490, July 7, 2009). On March 10, 2010, Continental, Inc. received a preliminary assessment notice (PAN) dated March 1, 2010 issued by the Commissioner of Internal Revenue (CIR) for deficiency income tax for its taxable year 2008. It failed to protest the PAN. The CIR thereupon issued a final assessment notice (FAN) with letter of demand on April 30, 2010. The FAN was received by the corporation on May 10, 2010, following which or on May 25, 2010, it filed its protest against it. The CIR denied the protest on the ground that the assessment had already become final and executory, the corporation having failed to protest the PAN. Is the CIR correct? Explain. (5%) SUGGESTED ANSWER: No. The issuance of preliminary assessment notice (PAN) does not give rise to the right of the taxpayer to protest. What can be protested by a taxpayer is the final assessment notice (FAN) or that assessment Page | 174

issued following the PAN. Since the FAN was timely protested (within 30 days from receipt thereof, the assessment did not become final and executory (Sec. 228, NIRC; RR No. 12-99). 2.  A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on June 15, 2000. The taxpayer protested the assessment on July 31, 2000. The protest was initially given due course, but was eventually denied by the Commissioner of Internal Revenue in a decision dated June 15, 2005. The taxpayer then filed a petition for review with the Court of Tax Appeals (CTA), but the CTA dismissed the same. [a] Is the CTA correct in dismissing the petition for review? Explain your answer. (4%) SUGGESTED ANSWER: Yes. The protest was filed out of time, hence the CTA does not acquire jurisdiction over the matter (CIR v. Atlas Mining and Development Corp. [2000]). (BAR 2009) c) Forms of protest d) Content and validity of protest (ii) Submission of documents within 60 days from filing of protest (iii) Effect of failure to protest (iv) Period provided for the protest to be acted upon (7) Rendition of decision by Commissioner (i) Denial of protest a) Commissioner’s actions equivalent to denial of protest  1.  A taxpayer received a tax deficiency assessment of P 1.2 Million from the BIR demanding payment within 10 days, otherwise, it would collect through summary remedies. The taxpayer requested for .a reconsideration stating the grounds therefor. Instead of resolving the request for reconsideration, the BIR sent a Final Notice Before Seizure to the taxpayer. May this action of the Commissioner of Internal Revenue be deemed a denial of the request for reconsideration of the taxpayer to entitle him to appeal to the Court of Tax Appeals? Decide with reasons. (5%) SUGGESTED ANSWER: Yes. The action of the Commissioner of Internal Revenue is deemed a denial of the request for reconsideration of the taxpayer, thus entitling him to appeal to the CTA. The Notice was the only response received by the taxpayer and its content and tenor supports the theory that it was the BIR’s final act regarding the request for reconsideration. The very title of the notice indicated that it was a “Final Notice Before Seizure" which means that the taxpayer’s properties   will be subjected to seizure to enforce the deficiency assessment. Thus, in one decided case, the Supreme Court ruled that the Final Notice Before Seizure is a final decision of the Commissioner on the disputed assessment [CIR v. Isabela Cultural Corp., 361 SCRA 71 (2001)].  ANOTHER SUGGESTED ANSWER: No, the Final Notice Before Seizure does not constitute a denial of the request for reconsideration. The Commissioner is mandated to come out with a decision clearly stating the facts and the law upon which it is based and that the same constitutes his final decision. (Revenue Regulations No. 12-99, Implementing Sec. 228, NIRC). It cannot merely be implied from the issuance of a Warrant of Distraint and Levy. [CIR v. Union Shipping Corp., 185 SCRA 547, (1990)]. Since the final notice before seizure is issued ahead of a Warrant of Distraint and Levy, with more reason that this earlier action cannot be considered as a denial of the protest. (BAR 2005) 2.  A Co., a Philippine corporation, received an income tax deficiency assessment from the BIR on May 5, 1995. On May 31, 1995, A Co. filed its protest with the BIR. On July 30, 1995. A Co. submitted to Page | 175

the BIR all relevant supporting documents. The CIR did not formally rule on the protest but on January 25. 1996, A Co. was served a summons and a copy of the complaint for collection of the tax deficiency filed by the BIR with the Regional Trial Court (RTC). On February 20. 1996, A Co. brought a Petition for Review before the CTA. The BIR contended that the Petition is premature since there was no formal denial of the protest of A Co. and should therefore be dismissed. 1. Has the CTA jurisdiction over the case? 2. Has the RTC jurisdiction over the collection case filed by the BIR? Explain. SUGGESTED ANSWER: 1) Yes, the CTA has jurisdiction over the case because this qualifies as an appeal from the Commissioner's decision on disputed assessment. When the Commissioner decided to collect the tax assessed without first deciding on the taxpayer's protest, the effect of the Commissioner is action of filing a judicial action for collection is a decision of denial of the protest, in which event the taxpayer may file an appeal with the CTA. (Republic v. Lim Tian Teng &. Sons, Inc., 16 SCRA 584; Dayrit v. Cruz, L-39910, Sept. 26, 1988). 2) The RTC has no jurisdiction over the collection case filed by the BIR. The filing of an appeal with the CTA has the effect of divesting the RTC of jurisdiction over the collection case. At the moment the taxpayer appeals the case to the Court of Tax Appeals in view of the Commissioner's filing of the collection case with the RTC which was considered as a decision of denial, it gives a justifiable basis for the taxpayer to move for dismissal in the RTC of the Government's action to collect the tax liability under dispute. {Yabesv.Flojo, 15 SCRA 278; San Juan v. Vasquez, 3 SCRA 92). There is no final, executory and demandable assessment which can be enforced by the BIR, once a timely appeal is filed. (BAR 1999) 3. CFB Corporation, a domestic corporation engaged in food processing and other allied activities, received a letter from the BIR assessing it for deliquency income taxes. CFB filed a letter of protest. One month after, a warrant of distraint and levy was served on CFB Corporation. If you were the lawyer engaged by CFB Corporation to contest the assessment made by the BIR, what steps will you take to protect your client? (5%) SUGGESTED ANSWER: I shall immediately file a motion for reconsideration of the issuance of the warrant of distraint and levy and seek from the BIR Commissioner a denial of the protest “in clear and unequivocal language.”This is so because the issuance of a warrant of distraint and levy is not considered as a denial by the BIR of the protest filed by CFB Corporation (CIR v. Union Shipping Corp. 185 SCRA 547). Within thirty (30) days from receipt of such denial “ln clear and unequivocal language," I shall then file a petition for review with the Court of Tax Appeals.

 ALTERNATIVE ANSWER: Within thirty (30) days from receipt of the warrant of distraint and levy, I shall file a petition for review with the Court of Tax Appeals with an application for issuance of a writ of preliminary injunction to enjoin the Bureau of Internal Revenue from enforcing the warrant. This is the action I shall take because I shall consider the issuance of the warrant as a final decision of the Commissioner of Internal Revenue which could be the subject of appeal to the Court of Tax Appeals (Yabes v. Flojo, 15 SCRA 278). The CTA may, however, remand the case to the BIR and require the Commissioner to specifically rule on the protest. The decision of the Commissioner, if adverse to my client, would then constitute an appeal- able decision. (BAR 1998) 4. If the request for re-investigation is denied, is it possible or advisable to file a petition for review Page | 176

with any court or agency as a last resort?  ANSWER: A denial of a request for re-investigation on an assessment partakes the nature of a decision if made by the Commissioner. In this a case, an appeal may be filed with the CTA within thirty days from receipt of the notice of denial.  ALTERNATIVE ANSWER: On the assumption that the denial by the BIR was not made by the Commissioner himself but by the regional officer, for instance, or that the request for re-investigation is not on an assessment as yet, then it may not necessarily constitute a decision on a disputed assessment from which an appeal may be made to the Court of Tax Appeals. (BAR 1992) (ii) Filing of criminal action against taxpayer (iii) Issuing a warrant of distraint and levy

a) Inaction by Commissioner (8) Remedies of taxpayer to action by Commissioner (i) In case of denial of protest 1.  A taxpayer received an assessment notice from the BIR on February 3, 2009. The following day, he filed a protest, in the form of a request for reinvestigation, against the assessment and submitted all relevant documents in support of the protest. On September 11, 2009, the taxpayer, apprehensive because he had not yet received notice of a decision by the Commissioner on his protest, sought your advice. What remedy or remedies are available to the taxpayer? Explain. (4%) SUGGESTED ANSWER: The remedy of a taxpayer is to avail of either of two options: 1. File a petition for review with the CTA within 30 days after the expiration of the 180-day period from submission of all relevant documents; or 2. Await the final decision of the Commissioner on the disputed assessment and appeal such final decision to the CTA within 30 days after receipt of a copy of such decision. These options are mutually exclusive such that resort to one bars the application of the other (RCBC v. OR, 522SCRA 144(2007]). (BAR 2009) 2. On June 1, 2003, Global Bank received a final notice of assessment from the BIR for deficiency documentary stamp tax in the amount of P5 Million. On June 30, 2003, Global Bank filed a request for reconsideration with the Commissioner of Internal Revenue. The Commissioner denied the request for reconsideration only on May 30, 2006, at the same time serving on Globed Bank a warrant of distraint to collect the deficiency tax. If you were its counsel, what will be your advice to the bank? Explain. 5% SUGGESTED ANSWER: The denial of the request for reconsideration is a final decision of the Commissioner of Internal Revenue. I would advise Global Bank to appeal the Commissioner’s denial to the Court of Tax Appeals (CTA) within 30 days from receipt, if the remedy of appeal is still available. I will further advise the bank to file a motion for injunction with the Court of Tax Appeals to enjoin the Commissioner from enforcing the assessment pending resolution of the appeal. While an appeal to the CTA will not suspend the payment, levy, distraint, and/or sale of any property of the taxpayer for the satisfaction of its tax liability, the CTA is authorized to Page | 177

give injunctive relief if the enforcement would jeopardize the interest of the taxpayer, as in this case where the assessment has not become final.  ANOTHER SUGGESTED ANSWER: Since the denial of the protest was made on May 30, 2006, I would assume that Global Bank has already lost its right to appeal. The assessment having become final for failure to file a timely appeal, I will now advise my client to file a request with the Commissioner of Internal Revenue for a compromise settlement of the tax assessed, which has already become final by invoking doubtful validity of the assessment (Sec. 204, NIRC).  ANOTHER SUGGESTED ANSWER: Since the assessment has already become final, I will now advise Global Bank to pay the assessment in order to save on the 20% interest which continues to run indefinitely until the entire obligation is paid (Sec. 249, NIRC). This will also save the taxpayer and its officers from possible criminal prosecution for non-payment of taxes considering that in taxation, criminal liability arises as a result of the civil liability to pay taxes (Republic v. Patanao,L-22356, 20 SCRA 712 [1967]). (BAR 2006) 3. CFB Corporation, a domestic corporation engaged in food processing and other allied activities, received a letter from the BIR assessing it for deliquency income taxes. CFB filed a letter of protest. One month after, a warrant of distraint and levy was served on CFB Corporation. If you were the lawyer engaged by CFB Corporation to contest the assessment made by the BIR, what steps will you take to protect your client? (5%) SUGGESTED ANSWER: I shall immediately file a motion for reconsideration of the issuance of the warrant of distraint and levy and seek from the BIR Commissioner a denial of the protest “in clear and unequivocal language.”This is so because the issuance of a warrant of distraint and levy is not considered as a denial by the BIR of the protest filed by CFB Corporation (CIR v. Union Shipping Corp. 185 SCRA 547). Within thirty (30) days from receipt of such denial “ln clear and unequivocal language," I shall then file a petition for review with the Court of Tax Appeals.

 ALTERNATIVE ANSWER: Within thirty (30) days from receipt of the warrant of distraint and levy, I shall file a petition for review with the Court of Tax Appeals with an application for issuance of a writ of preliminary injunction to enjoin the Bureau of Internal Revenue from enforcing the warrant. This is the action I shall take because I shall consider the issuance of the warrant as a final decision of the Commissioner of Internal Revenue which could be the subject of appeal to the Court of Tax Appeals (Yabes v. Flojo, 15 SCRA 278). The CTA may, however, remand the case to the BIR and require the Commissioner to specifically rule on the protest. The decision of the Commissioner, if adverse to my client, would then constitute an appeal- able decision. (BAR 1998) (ii) In case of inaction by Commissioner within 180 days from submission of

documents 1.  A taxpayer received an assessment notice from the BIR on February 3, 2009. The following day, he filed a protest, in the form of a request for reinvestigation, against the assessment and submitted all relevant documents in support of the protest. On September 11, 2009, the taxpayer, apprehensive because he had not yet received notice of a decision by the Commissioner on his protest, sought your advice. What remedy or remedies are available to the taxpayer? Explain. (4%) Page | 178

SUGGESTED ANSWER: The remedy of a taxpayer is to avail of either of two options: 1. File a petition for review with the CTA within 30 days after the expiration of the 180-day period from submission of all relevant documents; or 2. Await the final decision of the Commissioner on the disputed assessment and appeal such final decision to the CTA within 30 days after receipt of a copy of such decision. These options are mutually exclusive such that resort to one bars the application of the other (RCBC v. OR, 522SCRA 144(2007]). (BAR 2009) (iii) Effect of failure to appeal

b.Collection (1) Requisites (2) Prescriptive periods 1.  A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on June 15, 2000. The taxpayer protested the assessment on July 31, 2000. The protest was initially given due course, but was eventually denied by the Commissioner of Internal Revenue in a decision dated June 15, 2005. The taxpayer then filed a petition for review with the Court of Tax Appeals (CTA), but the CTA dismissed the same. [b] Assume that the CTA’s decision dismissing the petition for review has become final. May the Commissioner legally enforce collection of the delinquent tax? Explain. (4%)

SUGGESTED ANSWER: No. The protest was filed out of time and, therefore, did not suspend the running of the prescriptive period for the collection of the tax. Once the right to collect has prescribed, the Commissioner can no longer enforce collection of the tax liability against the taxpayer (CIR v. Atlas Mining and Development Corp., February 14,2000). (BAR 2009) 2. TY Corporation filed its final adjusted income tax return for 1993 on April 12,1994 showing a net loss from operations. After investigation, the BIR issued a pre-assessment notice on March 30, 1996. A final notice and demand letter dated April 15, 1997 was issued, personally delivered to and received by the company’s chief accountant. For willful refusal and failure of TY Corporation to pay the tax, warrants of distraint and levy on its properties were issued and served upon it. On January 10, 2002, a criminal charge for violation of the Tax Code was instituted in the Regional Trial Court with the approval of the Commissioner. The company moved to dismiss the criminal complaint on the ground that an act for violation of any provision of the Tax Code prescribes after five (5) years and, in this case, the period commenced to run on March 30,1996 when the pre-assessment was issued. How will you resolve the motion? Explain your answer. (5%) SUGGESTED ANSWER: The motion to dismiss should not be granted. It is only when the assessment has become final and unappealable that the 5-year period to file a criminal action commences to run (Tupaz v. Ulep, 316 SCRA 118 [1999]). The pre-assessment notice issued on March 30,1996 is not a final assessment which is enforceable by the BIR. It is the issuance of the final notice and demand letter dated April 15,1997 and the failure of the taxpayer to protest within 30 days from receipt thereof that made the assessment final and Page | 179

unappealable. The earliest date that the assessment has become final is May 16,1997 and since the criminal charge was instituted on January 10, 2002, the same was timely filed. (BAR 2002) 3. May the collection of taxes be barred by prescription? Explain your answer. (3%) SUGGESTED ANSWER: Yes. The collection of taxes may be barred by prescription. The prescriptive periods for collection of taxes are governed by the tax law imposing the tax. However, if the tax law does not provide for prescription, the right of the government to collect taxes becomes imprescriptible. (BAR 2001) 4. Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules that have been adopted on this score by – (b) The National Internal Revenue Code; SUGGESTED ANSWER: The rules that have been adopted on prescription are as follows: (b) National Internal Revenue Code - The statute of limitation for assessment of tax if a return is filed is within three (3) years from the last day prescribed by law for the filing of the return or if filed after the last day, within three years from date of actual filing. If no return is filed or the return filed is false or fraudulent, the period to assess is within ten years from discovery of the omission, fraud or falsity. (BAR 1997) 5. Fitness, Inc. is a domestic corporation engaged in the manufacture and sale of nutritional products. It pays royalties to its foreign licensor. After investigation, the BIR on December 17, 1974, sent a notice of assessment to Fitness, Inc. for allegedly failing to remit withholding tax at source for the fourth quarter of 1973 on its royalties. It demanded payment of P3,000,000.00. The notice was received by Fitness, Inc. on December 19, 1974. On February 8,1975, Fitness, Inc., through its counsel, protested the assessment and requested its cancellation or withdrawal on the ground that it lacked factual and legal bases. On December 10, 1979, the Commissioner of the BIR rendered a decision reducing the assessment to PI.500.000.00. Fitness. Inc. was not satisfied and on January 18.1980, it filed a petition for review of the decision in the CTA to enjoin the enforcement of the assessment. On February 7, 1980, the BIR issued a warrant of distraint against Fitness. Inc. The CTA enjoined the collection of the deficiency taxes by virtue of the warrant of distraint. It was argued by Fitness, Inc. that the right of the BIR to collect its alleged deficiency taxes had already prescribed. Rule on the argument.  ANSWER: The warrant of distraint was served on the taxpayer within the prescriptive period (then 5 years, now three (3) years). In Commissioner v. WyethSuaco (202 SCRA125), the court ruled that the prescriptive period provided by law to make collection by distraint and/or levy or by a proceeding in court is interrupted once a taxpayer protests the assessment and requests for its cancellation. Thus, when the taxpayer protested the assessment on 8 February 1975, the prescriptive period to collect was interrupted and resumed on 10 December 1979. When the Commissioner issued the warrant of distraint on 7 February 1980 it was well within the five-year (now 3 years) prescriptive period to collect.  ALTERNATIVE ANSWERS: a) The Burea u of Internal Revenue (“BIR") shall assess internal revenue taxes within three (3) years after the last day prescribed by law for the filing of return, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period (Section 203 of the National Internal Revenue Code [“NIRC"). How ever. this three (3)-year prescriptive period shall be suspended when the taxpayer requests for a reinvestigation and which is granted by the Commission (Section 224 of NIRC). In case an assessment was made, the tax may be collected within three (3) years from the date of assessment (Collector of Internal Revenue v. Pineda,2 SCRA 401; Page | 180

Umali, Roman A, Reviewer in Taxation,1985, pp. 486-487; Vitug, Jose C., Compendium of Tax Law and Jurisprudence, 2nd Rev., Ed., 1989, p. 255). If the taxpayer asks for a reinvestigation of the assessment and such reinvestigation is made, and on the basis of which the BIR makes another assessment, the three (3)-year period for collection is to be counted from the last assessment (Rep. v. Lopez,7 SCRA 566; Rep. v. Acebedo, 22 SCRA 1356; Umali, Roman A., Reviewer in Taxation,1985, pp. 486-487; Vitug, Jose C., Compendium of Tax Law and Jurisprudence, 2nd Rev., Ed., 1989, p. 255). In the case at bar, the running of the three (3)-year prescriptive period for the BIR to collect taxes started to run only on 10 December 1979, when a final assessment was made by the BIR reducing the tax due to One Million Five Hundred Thousand Pesos (PI,500,000.00). The distraint against Fitness, Inc. Hence, the action of the BIR to collect the deficiency taxes was clearly within the three (3)- year prescriptive period. b) The right of the BIR to collect the deficiency taxes has not prescribed, as the prescriptive period is

reckoned from the date of the reduced assessment, which is December 10, 1979. The BIR has three (3) years from said date to collect. The reduced assessment is In the nature of a compromise assessment, the first assessment received by Fitness on December 19,1974, and protested only on February 8,1975, having already become final and binding on Fitness. Applying the present provisions of the NIRC. Fitness should have protested the assessment within thirty (30) days from receipt of the same. Failing to do so, the assessment became final and was presumably merely compromised. The date of such compromise assessment should then be the basis for computing the prescriptive period of three (3) years. Note: Beginning 1984, the prescriptive period of the right of the government to assess and collect internal revenue taxes was reduced from five (5) to three (3) years. (BAR 1993) (3) Distraint of personal property including garnishment 1. Is the BIR authorized to issue a warrant of garnishment against the bank account of a taxpayer despite the pendency of his protest against the assessment with the BIR or appeal with the Court of Tax Appeals? [5%] SUGGESTED ANSWER: The BIR is authorized to issue a warrant of garnishment against the bank account of a taxpayer despite the pendency of protest (Yabes v. Flojo, 15 SCRA 278). Nowhere in the tax Code is the Commissioner required to rule first on the protest before he can institute collection proceedings on the tax assessed. The legislative policy is to give the Commissioner much latitude in the speedy and prompt collection of taxes because it is in taxation that the Government depends to obtain the means to carry on its operations (Republic v. Tim Tian Teng Sons, Inc., 16 SCRA 584). The Commissioner is not authorized to issue the warrant of garnishment during the pendency of appeal with the Court of Tax Appeals because the assessment is not yet final and unappealable.  ALTERNATIVE ANSWER: No. because the assessment has not yet become final, executory and demandable. The basic consideration in the collection of taxes is whether the assessment is final and unappealable or the decision of the Commissioner is final, executory and demandable, the BIR has legal basis to collect the tax liability by either administrative or judicial action. (BAR 1998) (i) Summary remedy of distraint of personal property

a) Purchase by the government at sale upon distraint b) Report of sale to the Bureau of Internal Revenue (BIR) Page | 181

c) Constructive distraint to protect the interest of the government d) Summary remedy of levy on real property 1. Is the BIR authorized to collect estate tax deficiencies by the summary remedy of levy upon and sale of real properties of the decedent without first securing the authority of the court sitting in probate over the supposed will of the decedent? [5%] SUGGESTED ANSWER: Yes. The BIR is authorized 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. As such the estate tax is exempted from the application of the statute of non-claims, and this is justified by the necessity of government funding, immortalized in the maxim that taxes are the lifeblood of the government (Marcos v. UR, G.R. No. 120880, June 5, 1997).  ALTERNATIVE ANSWER: Yes, if the tax assessment has already become final executory and enforceable. The approval of the court sitting in probate over the supposed will of the deceased is not a mandatory requirement for the collection of the estate tax. The 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. (Marcos v. CIR, G.R. No. 120880, June 5, 1997). (BAR 1998) Advertisement and sale Redemption of property sold Final deed of purchaser Forfeiture to government for want of bidder a) Remedy of enforcement of forfeitures (i) Action to contest forfeiture of chattel b) Resale of real estate taken for taxes (i) When property to be sold or destroyed (ii) Disposition of funds recovered in legal proceedings or obtained from forfeiture (vi) Further distraint or levy (vii) Tax lien (viii) Compromise (a) Authority of the Commissioner to compromise and abate taxes (ii) (iii) (iv) (v)

1. When the financial position of the taxpayer demonstrates a clear inability to pay the tax, the Commissioner of Internal Revenue may validly compromise the tax liability. SUGGESTED ANSWER: True. Financial incapacity is a ground allowed by law in order that the Commissioner of Internal Revenue may compromise a tax liability (Section 204, NIRC), (BAR 2009) 2.  After the tax assessment had become final and unappealable, the Commissioner of Internal Revenue initiated the fling of a civil action to collect the tax due from NX. After several years, a decision was rendered by the court ordering NX to pay the tax due plus penalties and surcharges. The judgment became final and executory, but attempts to execute the judgment award were futile.

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Subsequently, NX offered the Commissioner a compromise settlement of 50% of the judgment award, representing that this amount is all he could really afford. Does the Commissioner have the power to accept the compromise offer? Is it legal and ethical? Explain briefly. (5%) SUGGESTED ANSWER: Yes. The Commissioner has the power to accept the offer of compromise if the financial position of the taxpayer clearly demonstrates a clear inability to pay the tax (Section 204, NIRC). As represented by NX in his offer, only 50% of the judgment award is all he could really afford. This is an offer for compromise based on financial incapacity which the Commissioner shall not accept unless accompanied by a waiver of the secrecy of bank deposits (Section 6[F], NIRC). The waiver will enable the Commissioner to ascertain the financial position of the taxpayer, although the inquiry need not be limited only to the bank deposits of the taxpayer but also as to his financial position as reflected in his financial statements or other records upon which his property holdings can be ascertained. If indeed, the financial position of NX as determined by the Commissioner 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 10% of the basic tax assessed. (BAR 2004) 3.  A domestic corporation failed to withhold and remit the tax on income received from Philippine sources by a nonresident foreign corporation. In addition to the civil penalties provided for under the Tax Code, a compromise penalty was imposed for violation of the withholding tax provisions. May the Commissioner of Internal Revenue legally enforce the collection of compromise penalty? (5%) SUGGESTED ANSWER: No. There is no showing that the compromise penalty was imposed by the Commissioner of Internal Revenue with the agreement and conformity of the taxpayer. (Wonder Mechanical Engineering Corporation v. Court of Tax Appeals, et al. 64 SCRA 555). (BAR 2000) 4. Under what conditions may the Commissioner of Internal Revenue be authorized to: Compromise the payment of any internal revenue tax? (2%), and abate or cancel a tax liability? (3%) SUGGESTED ANSWER: The Commissioner of Internal Revenue may be authorized to compromise the payment of any internal revenue tax where: 1) A reasonable doubt as to the validity of the claim against the taxpayer exists: or 2) the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax. The Commissioner of Internal Revenue may abate or cancel a tax liability when: 1) The tax or any portion thereof appears to be unjustly or excessively assessed: or 3) The administration and collection costs involved do not justify the collection of the amount due. (Sec. 204 (B). NIRC of 1997] (BAR 2000) 5. May the Commissioner of the Internal Revenue compromise the payment of withholding tax (tax deducted and withheld at source) where the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax? (5%] SUGGESTED ANSWER: No. A 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 (Sec. 58[D]) and is Page | 183

obligated to remit them to the BIR. The subsequent inability of the withholding agent to pay/remit 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. (BAR 1998) 6. Explain the extent of the authority of the Commissioner of Internal Revenue to compromise and abate taxes?  ANSWER: The authority of the Commissioner to compromise encompasses both civil and criminal liabilities of the taxpayer. The civil compromise is allowed only in cases (a) where the tax assessment is of doubtful validity, or (b) when the financial position of the taxpayer demonstrates a clear inability to pay the tax. The compromise of the tax liability is possible at any stage of litigation and the amount of compromise is left to the discretion of the Commissioner except with respect to final assessments issued against laige taxpayers wherein the Commissioner cannot compromise for less than fifty percent (50%). Any compromise involving large taxpayers lower than fifty percent (50%) shall be subject to the approval of the Secretary of Finance. All criminal violations except those involving fraud, can be compromised by the Commissioner but only prior to the filing of the information with the Court. The Commissioner may also abate or cancel a tax liability when (a) the tax or any portion thereof appears to have been unjustly or excessively assessed; or (b) the administrative and collection costs involved do not justify collection of the amount due. (Sec. 204. NIRC) (BAR 1996) (ix) Civil and criminal actions

(a) Suit to recover tax based on false or fraudulent returns 1. Danilo, 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. The accountant filed a falsified tax return by underdeclaring the sales and overstating the expense deductions by Danilo. What is the liability, if any, of the accountant? Discuss. SUGGESTED ANSWER: The accountant may be held criminally liable for violation of the Tax Code when he falsified the tax return by underdeclaring the sale and overstating the expense deductions. (Sec. 257, NIRC). If Danny's accountant is a Certified Public Accountant, his certificate as CPA shall automatically be revoked or cancelled upon conviction. (BAR 2005) c. Refund (1) Grounds and requisites for refund 1. 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? (3%) SUGGESTED ANSWER: The 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: 1. He should file a written claim for refund with the Commissioner within two years after the date of payment of the tax or penalty (Sec. 204, NIRC); 2. The claim filed must state a categorical demand for reimbursement (Bermejo v. Collector, 87 Phil. 96 [1950]). Page | 184

3. The 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 (Sec. 229, NIRC). Note: If the answer given is only number 1, it is suggested that the same shall be given full credit considering that this is the only requirement for the Commissioner to acquire jurisdiction over the claim. (BAR 2002 (2) Requirements for refund as laid down by cases 1. Why is the filing of an administrative claim with the BIR necessary? (3%) SUGGESTED ANSWER: The filing of an administrative claim for refund with the BIR is necessary in order: 1) To afford the Commissioner an opportunity to consider the claim and to have a chance to correct the errors of subordinate officers (Gonzales v. CTA. et aL, 14 SCRA 79): and 2) To notify the Government that such taxes have been questioned and the notice should be borne in mind in estimating the revenue available for expenditures. [Bermejo v. Collector, G.R. No. L3028. Jufy 29, 1950) (i) Exceptions to requirement of a written claim:

1. Can the Commissioner grant a refund or tax credit even without a written claim for it? (2%) SUGGESTED ANSWER: Yes. When the taxpayer files a return which on its face shows an overpayment of the tax and the option to refund/ claim a tax credit was chosen by the taxpayer, the Commissioner shall grant the refund or tax credit without the need for a written claim. This is so, because a return filed showing an overpayment shall be considered as a written claim for credit or refund. (Secs. 76 and 204, NIRC). Moreover, the law provides that the Commissioner may, even without a written claim therefore, 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. ('Sec. 229, NIRC). (BAR 2002) (ii) Necessity of written claim for refund

1. If the retiree is within his legal rights in claiming refund of the taxes withheld, will the BIR automatically grant his claim? Explain your answer.  ANSWER: No. Because he must file a written claim. (BAR 1992) (iii) Claim containing a categorical demand for reimbursement (iv) Filing of administrative claim for refund and the suit/proceeding before the CTA

within 2 years from date of payment regardless of any supervening cause 1.  ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who are residents of the United States. For the 2nd quarter of 1983, these U.S.- based individual and corporate stockholders received cash dividends from the corporation. The corresponding withholding tax on dividend income —  30% for individual and 35% for corporate non-resident stockholders — was deducted at source and remitted to the BIR.

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On May 15,1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the U.S. the Commissioner denied the claim. On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand for refund. Does ABCD Corporation have the legal personality to file the refund on behalf of its non-resident stockholders? Why or why not? (3%) SUGGESTED ANSWER: Yes, withholding agents is not only an agent of the government but is also an agent of the taxpayer/income earner. Hence, ABCD is also an agent of the beneficial owner of the dividends with respect to the actual payment of the tax to the government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such for refund and to bring an action for recovery of such claim (CIR v. Procter & Gamble, 204 SCRA 377, {1991}) (BAR 2009) 2. On March 12, 2001, REN paid his taxes. Ten months later, he realized that he had overpaid and so he immediately filed a claim for refund with the Commissioner of Internal Revenue. On February 27, 2003, he received the decision of the Commissioner denying REN’s claim for refund. On March 24, 2003, REN filed an appeal with the Court of Tax Appeals. Was his appeal filed on time or not? Reason. (5%)

SUGGESTED ANSWER: The appeal was not filed on time. The two-year period of limitation for filing 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 Court of Tax Appeals. The law provides that no suit or proceeding shall be filed 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 (Section 229, NIRC). Since the appeal was only made on March 24, 2003, more than two years had already elapsed from the time the taxes were paid on March 12, 2003. Accordingly, REN had lost his judicial remedy because of prescription. (BAR 2004) 3. XCEL Corporation filed its quarterly income tax return for the first quarter of 1985 and paid an Income tax of P500.000.00 on May 15, 1985. In the subsequent quarters, XCEL suffered losses so that on April 15, 1986 it declared a net loss of PI,000,000.00 in its annual income tax return. After failing to get a refund, XCEL filed on March 1, 1988 a case with the Court of Tax Appeals to recover the P500.000.00 in taxes paid on May 15, 1985. Is the action to recover the taxes filed timely?  ANSWER: The action for refund was filed in the Court of Tax Appeals on time. In the case of Commissioner v. TMX Sales.fnc., 205 SCRA 184, which is similar to this case, the Supreme Court ruled that in the case of overpaid quarterly corporate income tax, the two-year period for filing claims for refund In the BIR as well as in the institution of an action for refund in the CTA, the two-year prescriptive period for tax refunds (Sec. 230, Tax Code) is counted from the filing of the final, adjustment return under Sec. 67 of the Tax Code, and not from the filing of the quarterly return and payment of the quarterly tax. The CTA action on March 1, 1988 was clearly within the reglementary two-year period from the filing of the final adjustment return of the corporation on April 15, 1986. (BAR 1994) 4. Mr. Dante Raymundo retired from the government service as Director of Land Transportation on January 6, 1985. Upon retirement, Mr. Raymundo received, among other benefits, his terminal Page | 186

leave pay for which the BIR withheld the sum of P56.000.00 a week following the date of his retirement. On October 17, 1991, following the decision of the Supreme Court that the money value of the accumulated leave credits/terminal pay is not subject to witholding tax, Mr. Raymundo filed a claim for refund of P56.000.00 with the Commissioner of Internal Revenue. Is Mr. Raymundo within his rights in claiming a refund of taxes withheld on his terminal leave following the Supreme Court decision?  ANSWER: No. Under Section 230 of the NIRC, a suit for the recovery of tax erroneously or illegally collected cannot be filed after the expiration of two years from the date of payment of tax regardless of any supervening cause that may arise after payment. Thus, the right of Mr. Raymundo to claim for refund has already prescribed. (BAR 1992) 5.  Assuming that the BIR denies the claim for refund, what could be the possible reason or statutory basis for such a denial?  ANSWER: The possible reason for a denial would be that the written claim has already prescibed or that the terminal pay leave is not excluded from income tax. Sec. 230, NIRC (supra). (BAR 1992) 6. Discuss the theory of supervening event as it applies to claims for refund of erroneously/illegally collected taxes. Can the retiree claim a refund under this theory? Explain. SUGGESTED ANSWER: The theory of supervening event expresses that an event which is beyond the control of the parties would allow the recovery of erroneously or illegally collected taxes provided the proceeding for such recovery is made within the prescriptive period from the occurrence of such event. The theory of the supervening event has been abrogated by Section 230 of the NIRC. (BAR 1992) (3) Legal basis of tax refunds (4) Statutory basis for tax refund under the tax code (i) Scope of claims for refund (ii) Necessity of proof for claim or refund 1. International Technologies, Inc. (ITI) filed a claim for refund for unutilized input VAT with the Court of Tax Appeals (CTA). In the course of the trial, ITI engaged the services of an independent Certified Public Accountant (CPA) who examined the voluminous invoices and receipts of ITI. ITI offered in evidence only the summary prepared by the CPA, without the invoices and the receipts, and then submitted the case for decision. Can the CTA grant ITI’s claim for refund based only on the CPA’s summary? Explain. (4%)

SUGGESTED ANSWER: No. The summary prepared by the CPA does not prove anything unless the documents which were the basis of the summary are submitted to the CTA and adduced in evidence. The invoices and receipts must be presented because they are the only real and direct evidence that would enable the Court to determine with particular certainty the basis of the refund (CIR v. Rio Tuba Nickel Mining Corp., 207SCRA S49[l992]). (BAR 2009) (iii) Burden of proof for claim of refund (iv) Nature of erroneously-paid tax/illegally assessed collected Page | 187

1. Distinguish between a taxpayer’s remedies in con nection with his tax assessment and/or demand and his claim for refund of taxes alleged to have been erroneously or illegally collected.  ANSWER: A tax assessment becomes final unless it is disputed or contested within 30 days from receipt thereof by the taxpayer. If the action taken by the Commissioner on the request for reconsideration is unacceptable to the taxpayer, the latter must then appeal, by way of Petition for Review to the Court of Tax Appeals within thirty days from receipt of the decision of the Commissioner of Internal Revenue. The taxpayer may also opt to pay the tax before the finality of the assessment (e.g., within 30 days from receipt of the assessment) and then file within two years a written claim for the refund of the tax. A denial by the Commissioner of a claim for refund must be appealed to the CTA within thirty days from receipt of notice of denial and within two years from the day of full and final payment. Continued inaction by the Commissioner on claims for refund may thus be taken as a denial appealable to the Court of Tax Appeals, in order to permit the appeal to be considered or having been made within the two-year mandatory period. (BAR 1992) (v) Tax refund vis-à-vis tax credit

1. Congress enacts a law granting grade school and high school students a 10% discount on all schoolprescribed textbooks purchased from any bookstore. The law allows bookstores to claim in full the discount as a tax credit. 1. If in a taxable year a bookstore has no tax due on which to apply the tax credits, can the bookstore claim from the BIR a tax refund in lieu of tax credit? Explain. 2.5% 2. XXX 3.

If a bookstore closes its business due to losses without 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 taking of private property for public use without just compensation? Explain. 5%

SUGGESTED ANSWER: 1. No. The law is clear that bookstores can only claim the discount as a tax credit. The term tax credit connotes that the amount when claimed shall only be treated as a reduction from any tax liability, plain and simple. There is nothing in the law that grants a refund when the bookstore has no tax liability against which the tax credit can be used (CIR v. Central Luzon Drug Corp., 456 SCRA 414 [2005]). 3. No, the bookstore cannot claim reimbursement. The tax credit privilege given to it is the compensation for the subsidy taken by the government for the benefit of a class of taxpayers to which the students belong. However, the privilege granted is limited only to the reduction of a present or future tax liability because by its nature, it is the existence or lack of a tax liability that determines whether the discount can be used as a tax credit. Accordingly, if the business continues to operate at a loss and no other taxes are due, compelling the business to close shop, the credit can never be applied and will be lost altogether. (CIR v. Central Luzon Drug Corp., Id.) (BAR 2006) (vi) Essential requisites for claim of refund

1. State the conditions required by the Tax Code before the Commissioner of Internal Revenue could authorize the refund or credit of taxes erroneously or illegally received. SUGGESTED ANSWER: The conditions are: Page | 188

(1) A written claim for refund is filed by the taxpayer with the Commissioner of Internal Revenue. (Sec. 204, NIRC); (2) The claim for refund must be a categorical demand for reimbursement. [Bermejo v. Collector of Internal Revenue, 87 Phil. 96 (1950)]; (3) The claim for refund or tax credit must be filed with the Commissioner, or the suit or proceeding therefore must be commenced in court within 2 years from date of payment of the tax or penalty regardless of any supervening cause (Sec. 229, NIRC). (BAR 2005) (5) Who may claim/apply for tax refund/tax credit (i) Taxpayer/withholding agents of non-resident foreign corporation 1.  ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who are residents of the United States. For the 2nd quarter of 1983, these U.S.- based individual and corporate stockholders received cash dividends from the corporation. The corresponding withholding tax on dividend income —  30% for individual and 35% for corporate non-resident stockholders — was deducted at source and remitted to the BIR. On May 15,1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund, alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the cash dividends given to its non-resident stockholders in the U.S. the Commissioner denied the claim. On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand for refund. Does ABCD Corporation have the legal personality to file the refund on behalf of its non-resident stockholders? Why or why not? (3%) SUGGESTED ANSWER: Yes, withholding agents is not only an agent of the government but is also an agent of the taxpayer/income earner. Hence, ABCD is also an agent of the beneficial owner of the dividends with respect to the actual payment of the tax to the government, such authority may reasonably be held to include the authority to file a claim for refund and to bring an action for recovery of such for refund and to bring an action for recovery of such claim (CIR v. Procter & Gamble, 204 SCRA 37 7, {1991}) (BAR 2009) 2. DEF Corporation is a wholly owned subsidiary of DEF, Inc., California, USA. Starting December 15, 2004. DEF Corporation paid annual royalties to DEF, Inc., for the use of the latter's software, for which the former, as withholding agent of the government, withheld and remitted to the BIR the 15% final tax based on the gross royalty payments. The withholding tax return was filed and the tax remitted to the BIR on January 10 of the following year. On April 10, 2007, DEF Corporation filed a written claim for tax credit with the BIR, arising from erroneously paid income taxes covering the years 2004 and 2005. The following day, DEF Corporation filed a petition for review with the Court of Tax Appeals. involving the tax credit claim for 2004 and 2005. b) Can the BIR lawyer raise the defense that DEF Corporation is not the proper party to file such claim for tax credit? Explain. (3%) SUGGESTED ANSWER: b) No. The withholding agent who is mandated by law to withhold and remit the tax on the income of a non-resident in the Philippines becomes directly liable for the payment of the tax. Therefore, it is the Page | 189

proper party to file a claim for refund in case of over-withholding. (Commissioner v. Wander Philippines, Inc., 160SCRA 573 [1988]). (BAR 2008) 3. Does a withholding agent have the right to file an application for tax refund? SUGGESTED ANSWER: Yes. A withholding agent should be allowed to claim for tax refund, because under the law said agent is the one who is held liable for any violation of the withholding tax law should such violation occur [Commissioner of Internal Revenue v. Wander Philippines Inc., 160 SCRA 570, (1988)1. Furthermore, since the withholding agent is made personally liable to deduct and withhold any tax under Section 53(c) of the Tax Code, it is imperative that he be considered the taxpayer for all legal intents and purposes. Thus, by any reasonable standard, such person should be regarded as a party in interest to bring suit for refund of taxes [Commissioner of Internal Revenue v. Procter and Gamble Philippines Manufacturing Corporation and CTA, 204 SCRA 377, (1991). (BAR 2005) 4.  A Co. is the wholly owned subsidiary of B Co., a non-resident German company. A Co. has a trademark licensing agreement with B Co. On Feb. 10, 1995, A Co. remitted to B Co. royalties of P 10,000,000, which A Co. subjected to aWT of 25% or P2,500,000. Upon advice of counsel, A Co. realized that the proper WT rate is 10%. On March 20, 1996, A Co. filed a claim for refund of P2,500,000 with the BIR The BIR denied the claim on Nov. 15, 1996. On Nov. 28, 1996, ACo. filed a petition for review with the CTA The BIR attacked the capacity of A Co.. as agent, to bring the refund case. Decide the issue. (5%) SUGGESTED ANSWER: A Co., 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 Philippines. Being 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 overwithholding. (CIR v. Wander Phils. Inc., GR No. 68378, April 15, 1988, 160 SCRA 573; CIR v. Procter & Gamble PMC, 204 SCRA 377). (BAR 1999) 5. Corporation X declared cash dividends in favor of its non-resident stockholders in the United States from which amount, the tax on dividend income was withheld. Under the RP-US Tax Treaty, deductions allowed as tax on dividends earned at source were fixed at lower rates giving rise to overpayment of the tax on dividends paid to the nonresident US stockholders (representing the difference between the amount of withholding tax paid and the amount supposed to have been withheld under the mentioned tax covenant). Corporation X filed a claim for refund of said overpayment with the Commissioner of Internal Revenue within the prescribed period which however, remained unacted upon, and before the expiration of the two (2) year reglementary period, it filed a judicial claim for refund with the Court of Tax Appeals. Respondent Commissioner of Internal Revenue argues that Corporation X is not the real party in interest to prosecute a claim for refund of the overpaid taxes of the nonresident US stockholders, who are the real parties in interest. But neither could it maintain an action for refund in a representative capacity having failed to show proof of authorization. Will Corporation X*s case prosper? Explain.  ANSWER: Yes. A subsidiary, while not the real party in interest, could prosecute a claim of refund in behalf of its non-resident stockholders by virtue of its being the withholding agent for the government in respect of the cash dividends it declared [Comm. vs. Wander Phils.). Page | 190

 ALTERNATIVE ANSWERS: No. The tax is due on the non-resident stockholders. The rule is that the refund may be claimed by the taxpayer on whom the tax is imposed and who effectively paid the tax. (BAR 1992) (6) Prescriptive period for recovery of tax erroneously or illegally collected 1. DEF Corporation is a wholly owned subsidiary of DEF, Inc., California, USA. Starting December 15, 2004. DEF Corporation paid annual royalties to DEF, Inc., for the use of the latter's software, for which the former, as withholding agent of the government, withheld and remitted to the BIR the 15% final tax based on the gross royalty payments. The withholding tax return was filed and the tax remitted to the BIR on January 10 of the following year. On April 10, 2007, DEF Corporation filed a written claim for tax credit with the BIR, arising from erroneously paid income taxes covering the years 2004 and 2005. The following day, DEF Corporation filed a petition for review with the Court of Tax Appeals. involving the tax credit claim for 2004 and 2005. a) As a BIR lawyer handling the case, would you raise the defense of prescription in your answer to the claim for tax credit? Explain. (3%) SUGGESTED ANSWER: a) Yes. The claim for refund for the2004erroneously paid income tax was filed out of time because the claim was only filed after more than two years had elapsed from the payment thereof. (Section 204 (c) and 229, NIRC). (BAR 2008) 2. On March 12, 2001, REN paid his taxes. Ten months later, he realized that he had overpaid and so he immediately filed a claim for refund with the Commissioner of Internal Revenue. On February 27, 2003, he received the decision of the Commissioner denying REN’s claim for refund. On March 24, 2003, REN filed an appeal with the Court of Tax Appeals. Was his appeal filed on time or not? Reason. (5%)

SUGGESTED ANSWER: The appeal was not filed on time. The two-year period of limitation for filing 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 Court of Tax Appeals. The law provides that no suit or proceeding shall be filed 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 (Section 229, NIRC). Since the appeal was only made on March 24, 2003, more than two years had already elapsed from the time the taxes were paid on March 12, 2003. Accordingly, REN had lost his judicial remedy because of prescription. (BAR 2004) 3.  A corporation files its income tax return on a calendar year basis. For the first quarter of 1993, it paid on 30 May 1993 its quarterly income tax in the amount of P3.0 million. On 20 August 1993, it paid the second quarterly income tax of P0.5 million. The third quarter resulted in a net loss, and no tax was paid. For the fourth and final return for 1993, 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 quarterly income tax payments. On 10 January 1994, the corporation filed with the Bureau of Internal Revenue a written claim for the refund of P3.5 million. BIR failed to act on the claim for refund; hence, on 02 March 1996, the corporation filed a petition for review with the Court of Tax Appeals on its claim for refund of the overpayment of its 1993 quarterly income tax. BIR, in its answer to the petition, alleged that the claim for refund was filed beyond the reglementary period. Page | 191

Did the claim for refund prescribe?  ANSWER: The claim for refund has prescribed. The counting of the two-year prescriptive period for filing a claim for refund is counted not from the date when the quarterly income taxes were paid but on the date when the final adjustment return or annual income tax return was filed (CIR v. TMX Sales Inc., G.R. No. 83736, January 15, 1992; CIR v. PhilAm Life Insurance Co., Inc., G.R. No. 105208, May 29, 1995). It is obvious that the annual income tax return was filed before January 10, 1994 because the written claim for refund was filed with the BIR on January 10,1994. Since 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 judicial stage, the petition for review filed with the CTA on March 02, 1996 is beyond the reglementary period. (BAR 1997) 4. Is protest at the time of payment of taxes/duties a requirement to preserve the taxpayers’ right to claim a refund? Explain.  ANSWER: For taxes imposed under the NIRC, protest at the time of payment is not required to preserve the taxpayers’ right to claim refund. This is clear under Section 230 of the NIRC 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. For duties imposed under the Tariff and Customs Code, a protest at the time of payment is required to preserve the taxpayers’ claim for refund. The procedure under the TCC is to the effect that when a ruling or decision of the Collector of Customs is made whereby liability for duties is determined, the party adversely affected may protest such ruling or decision by presenting to the Collector, at the time when payment is made, or within fifteen days thereafter, a written protest setting forth his objections to the ruling or decision in question (Sec. 2308, TCC). (BAR 1996) 5.  Apple Computer Corp. (ACC) is a foreign corporation doing business in the Philippines through a local branch located at Makati, Metro Manila. In 1985, the local branch applied with the Central Bank for authority to remit to ACC branch profits amounting to P8,000,000.00. After paying the 15% branch remittance tax of PI,200,000.00, the branch office remitted to ACC the balance of P6.800.000.00. In January 1986, the branch office was advised by its. legal counsel that it overpaid the branch remittance tax since the basis of the computation thereof should be the amount actually remitted and not the amount applied for. Accordingly, the branch office applied for a refund in the amount of P180.000.00. If you were the Commissioner of Internal Revenue, would you grant the claim for refund?  ANSWER: If I were the Commissioner of Internal Revenue, I would allow the claim for refund. The remittance tax should be computed on the amount actually remitted (Marubeni Corporation vs. Commissioner, G.R No. 76573, 14 September 1989). In the refund of taxes, the claim therefor can be filed within two (2) years from the time of payment so long as the tax payment was made before an assessment by the Commissioner has become final (Sec. 230, N1RC). (BAR 1991) (7) Other consideration affecting tax refunds 2.

Government remedies a. Administrative remedies (1) Tax lien (2) Levy and sale of real property (3) Forfeiture of real property to the government for want of bidder Page | 192

(4) Further distraint and levy (5) Suspension of business operation (6) Non-availability of injunction to restrain collection of tax b.Judicial remedies 3. Statutory offenses and penalties a. Civil penalties (1) Surcharge 1. What constitutes prima facie evidence of a false or fraudulent return to justify the imposition of a 50% surcharge on the deficiency tax due from a taxpayer? Explain. (5%) SUGGESTED ANSWER: There is a prima facie evidence of false or fraudulent return when the taxpayer substantially underdeclared his taxable sales, receipts or income, or substantially overstated his deductions, the taxpayer’s failure to report sales, receipts or income in an amount exceeding 30% of that declared per return, and a claim of deduction in an amount exceeding 30% of actual deduction shall render the taxpayer liable for substantial underdeclaration and overdeclaration, respectively, and will justify the imposition of the 50% surcharge on the deficiency tax due from the taxpayer. (Sec. 248, NIRC). (BAR 2002) (2) Interest (i) In general (ii) Deficiency interest 1. Danilo, 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. The accountant filed a falsified tax return by underdeclaring the sales and overstating the expense deductions by Danilo. Is Danilo liable for the deficiency tax and the penalties thereon? What is the liability, if any, of the accountant? Discuss. (5%) SUGGESTED ANSWER: Yes, Danilo is liable for the deficiency tax as well as for the deficiency interest. However, he is not liable to the fraud penalty because the accountant acted beyond the limits of his authority. A tax return which does not correctly reflect taxable income may only be false but not necessarily fraudulent where it appears that the return was not prepared by the taxpayer himself but by his accountant. Accordingly, the 50% surcharge for fraud could not be imposed. [Aznar v. CTA, 58 SCRA 719, (1974)]. On the other hand, the accountant may be held criminally liable for violation of the Tax Code when he falsified the tax return by underdeclaring the sale and overstating the expense deductions. (Sec. 257, NIRC). If Danny's accountant is a Certified Public Accountant, his certificate as CPA shall automatically be revoked or cancelled upon conviction. (BAR 2005) 2. What is a “deficiency interest" for purposes of the income tax? Illustrate.  ANSWER: Deficiency interest 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 20% per annum or the Manila Reference Rate, whichever is higher, from the date prescribed for i ts payment until it is fully paid. If for example after the audit of the books of XYZCorp. for taxable year 1993 there was found to be due a deficiency income tax of PI25,000.00 inclusive of the 25% surcharge imposed under Section 248 of the Tax Code, the interest will be computed on the P125.000.00 from April 15, 1994 up to its date of payment. (BAR 1995) Page | 193

(iii) Delinquency interest

1. What is a “delinquency interest" for purposes of the income tax? Illustrate.  ANSWER: Delinquency interest is the interest of 20% or the Manila Reference Rate, whichever is higher, required to be paid in case of failure to pay: a) the amount of the tax due on any return required to be filed; or b) the amount of the tax due for which return is required; or c) the deficiency tax or any surcharge or interest thereon, on the due date appearing in the notice and demand of the Commissioner of Internal Revenue. If in the above illustration the assessment notice was released on December31,1994 and the amount of deficiency tax, inclusive of surcharge and deficiency interest were computed up to January 30, 1995 which is the due date for payment per assessment notice, failure to pay on this latter date will render the tax delinquent and will require the payment of delinquency interest. (BAR 1995) (iv) Interest on extended payment

Compromise and abatement of taxes a. Compromise 1. State and discuss briefly whether the following cases may be compromised or may not be compromised: 4.

a) Delinquent accounts: b) Cases under administrative protest, after issuance of the final assessment notice to the taxpayer, which are still pending: c) Criminal tax fraud cases; d) Criminal violations already filed in court; e) Cases where final 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 required agreement form. (5%) SUGGESTED ANSWER: a) Delinquent accounts may be compromised if either of the two conditions is present: (1) the assessment is of doubtful validity, or (2) the financial position of the taxpayer demonstrates a clear inability to pay the tax. (Sec. 204(A), NIRC; Sec. 2 of Revenue Regulations No. 30- 2002). b) These may be compromised, provided that it is premised upon doubtful validity of the assessment or financial incapacity to pay (ibid). c) These may not be compromised, so that the taxpayer may not profit from his fraud, thereby discouraging its commission (ibid). d) These may not be compromised in order that the taxpayer will not profit from his criminal acts (ibid). e) Cases where final 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 required agreement form, cannot be compromised. By giving his conformity to the revised assessment, the taxpayer admits the validity of the assessment and his capacity to pay the same. (Sec. 2 of Revenue Regulations No. 30-2002). (BAR 2005) 2. Minolta Philippines, Inc. (Minolta) is an EPZA-registered enterprise enjoying preferential tax treatment under a special law. After investigation of its withholding tax returns for the taxable Page | 194

year 1997, the BIR issued a deficiency withholding tax assessment in the amount of P150,000.00. On May 15, 1999, because of financial difficulty, the deficiency tax remained unpaid, as a result of which the assessment became final and executory. The BIR also found that, in violation of the provisions of the National Internal Revenue Code, Minolta did not file its final corporate income tax return for the taxable year 1998, because it allegedly incurred net toss from its operations. On May 17, 2002, the BIR filed with the Regional Trial Court an action for collection of the deficiency withholding tax for 1997. May criminal violations of the Tax Code be compromised? If Minolta makes a voluntary offer to compromise the criminal violations for non-filing and non-payment of taxes for the year 1998, may the Commissioner accept the offer? Explain (5%) SUGGESTED ANSWER: All criminal violations of the Tax Code may be compromised except those already filed in court or those involving fraud (Section 204, NIRC). Accordingly, if Minolta makes a voluntary offer to compromise the criminal violations for non-filing and non-payment of taxes for the year 1998, the Commissioner may accept the offer which is allowed by law. However, if it can be established that a tax has not been paid as a consequence of non-filing of the return, the civil liability for taxes may be dealt with independently of the criminal violations. The compromise settlement of the criminal violations will not relieve the taxpayer from its civil liability. But the civil liability for taxes may also be compromised if the financial position of the taxpayer demonstrates a clear inability to pay the tax. (BAR 2002) 3.  An information was filed in court for willful non-payment of income tax the assessment of which has become final. The accused, through counsel, presented a motion that he be allowed to compromise his tax liability subject of the information. The prosecutor indicated his conformity to the motion. Is this procedure correct? (5%] SUGGESTED ANSWER: No. Criminal violations, if already filed in court, may not be compromised (Sec. 204[B], NIRC). Furthermore, the payment of the tax due after apprehension shall not constitute a valid defense in any prosecution for violation of any provisions of the Tax Code (Sec. 247(a), NIRC). Finally, there is no showing that the prosecutor in the problem is a legal officer of the Bureau of Internal Revenue to whom the conduct of criminal actions is lodged by the Tax Code.  ALTERNATIVE ANSWER: No. If the compromise referred to is the civil aspect, the procedure followed is not correct. Compromise for the payment of any internal revenue tax shall be made only by the Commissioner of Internal Revenue or in a proper case the Evaluation Board of the BIR (Sec. 204, NIRC). Applying the law to the case at bar, compromise settlement can only be effected by leave of Court. (BAR 1998) 4. May the Commissioner of the Internal Revenue compromise the payment of withholding tax (tax deducted and withheld at source) where the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax? (5%] SUGGESTED ANSWER: No. A 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 (Sec. 58[D]) and is obligated to remit them to the BIR. The subsequent inability of the withholding agent to pay/remit 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. (BAR 1998) 5. May the tax liability of a taxpayer be compromised during the pendency of an appeal? Explain.  ANSWER: Page | 195

Yes. During 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, ie. doubtful validity of assessment and financial incapacity of taxpayer, is present. A 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 (Pasudeco vs. CIR. L-39387. June 29. 1982). (BAR 1996) b.Abatement F. Organization and Function of the Bureau of Internal Revenue 1. Rule-making authority of the Secretary of Finance a. Authority of Secretary of Finance to promulgate rules and regulations 1. XYZ Corporation, an export-oriented company, was able to secure a Bureau of Internal Revenue (BIR) ruling in June 2005 that exempts from tax the importation of some of its raw materials. The ruling is of first impression, which means the interpretations made by the Commissioner of Internal Revenue are one without established precedents. Subsequently, however, the BIR issued another ruling which in effect would subject to tax such kind of importation. XYZ Corporation is concerned that said ruling may have a retroactive effect, which means that all their importations done before the issuance of the second ruling could be subject to tax. What are BIR rulings? SUGGESTED ANSWERS: BIR rulings are administrative opinions issued by the Commissioner of Internal Revenue interpretative of a provision of a tax law.  ALTERNATIVE ANSWER: They are the best guess of the moment and incidentally often contain such well-considered and sound law, but the courts have held that they do not prevent an entire change of front at any time and are merely advisory - sort of an information service to the taxpayer. (Aban, Law of Basic Taxation in the Philippines, p. 149 citing Quiazon and Lukban). (BAR 2007) b.Specific provisions to be contained in rules and regulations 1. What is required to make a BIR ruling of first impression a valid one? SUGGESTED ANSWER: A BIR ruling of first impression to be valid must not be against the law and it must be issued only by the Commissioner of Internal Revenue. (Philippine Bank of Communications v. CIR, 302 SCRA 241 [1999]; Section 7, NIRC). (BAR 2007) c. Non-retroactivity of rulings 1. Does a BIR ruling have a retroactive effect, considering the principle that tax exemptions should be interpreted strictly against the taxpayer? SUGGESTED ANSWER: No. A BIR ruling cannot be given retroactive effect if its retroactive application is prejudicial to the taxpayer. (Section 246, NIRC; CIR v. Court of Appeals et. al. 267 SCRA 557[1997]).  ALTERNATIVE ANSWER: The general rule is that a BIR ruling does not have a retroactive effect if giving it a retroactive application is prejudicial to the taxpayer. However, if the first ruling is tainted with either of the following: (1) misstatement or omission of material facts, (2) the facts gathered by the BIR are materially different from Page | 196

the facts upon which the ruling is based, or (3) the taxpayer acted in bad faith, a subsequent ruling can have a retroactive application. (ABS-CBN Broadcasting Co. v. CTA & CIR, 08 SCRA 142 [1981]; Sec 246, NIRC). (BAR 2007) 2. Due to an uncertainty whether or not a new tax law is applicable to printing companies. DEF Printers submitted a legal query to the Bureau of Internal Revenue on that issue. The BIR issued a ruling that printing companies are not covered by the new law. Relying on this ruling, DEF Printers did not pay said tax. Subsequently, however, the BIR reversed the ruling and issued a new one stating that the tax covers printing companies. Could the BIR now assess DEF Printers for back taxes corresponding to the years before the new ruling? Reason briefly. (5%) SUGGESTED ANSWER: No. Reversal of a ruling shall not be given a retroactive application if said reversal will be prejudicial to the taxpayer. Therefore, the BIR can not assess DEF printers for back taxes because it would be violative of the principle of non-retroactivity of rulings and doing so would result in grave injustice to the taxpayer who relied on the first ruling in good faith (Section 246, NIRC; CIR v. Burroughs, Inc,, 142 SCRA 32411986]), (BAR 2004) 2.

Power of the Commissioner to suspend the business operation of a taxpayer

III. Local Government Code of 1991, as amended

A. Local government taxation 1. Fundamental principles 2. Nature and source of taxing power 1. What is the nature of the taxing power of the provinces, municipalities and cities? How will the local government units be able to exercise their taxing powers? SUGGESTED ANSWER: The taxing power of the provinces, municipalities and cities is directly conferred by the Constitution by giving them the authority to create their own sources of revenue. The local government units do not exercise the power to tax as an inherent power or by a valid delegation of the power by Congress, but pursuant to a direct authority conferred by the Constitution. (Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667 [1996]; NPC v. City of Cabanatuan, 401 SCRA 259 [2003]). The local government units exercise the power to tax by levying taxes, fees and charges consistent with the basic policy of local autonomy, and to assess and collect all these taxes, fees and charges which will exclusively accrue to them. The local government units are authorized to pass tax ordinances (levy) and to pursue actions for the assessment and collection of the taxes imposed in said ordinances. (Section 129, and 132, Local Government Code). (BAR 2007) 2. Which of the following propositions may now be untenable: 1. The court should construe a law granting tax exemption strictly against the taxpayer. 2. The court should construe a law granting a municipal corporation the power to tax most strictly. 3. The Court of Tax Appeals has jurisdiction over decisions of the Customs Commissioner in cases involving liability for customs duties. 4. The Court of Appeals has jurisdiction to review decisions of the Court of Tax Appeals. 5. The Supreme Court has jurisdiction to review decisions of the Court of Appeals. Page | 197

Justify your answer or choice briefly. (5%) SUGGESTED ANSWER: 2. The court should construe a law granting a municipal corporation the power to tax most strictly. This proposition is now untenable. The basic rationale for the grant of tax power to local government units is to safeguard their viability and self-sufficiency by directly granting them general and broad tax powers (Manila Electric Company). Province of Laguna et. al 306 SCRA 750 [1999). Considering 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 Constitution, in interpreting statutory provisions on municipal fiscal powers, doubts will, therefore, have to be resolved in favor of municipal corporations (City Government of San Pablo, Laguna v. Reyes, 305 SCRA 353 (1999]). This means that the court must adopt a liberal construction of a law granting a municipal corporation the power to tax. Note: Of the examinee chose proposition no. 4 as his answer, it should be given full credit considering that the present CTA Act (R.A. No. 9282) has made the CTA a coequal judicial body of the Court of Appeals. The question “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-off date adopted by the Bar Examination Committee. R.A. No. 9282 was passed on March 30, 2004. (BAR 2004) 3. Congress, 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 system of taxation by centralizing the imposition and collection of all taxes in the national government. Accordingly, it is thinking 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 Constitution? Explain your answer. (5%) SUGGESTED ANSWER: No. The law centralizing the imposition and collection of all taxes in the national government would contravene the Constitution which mandates that : . . . "Each local government unit shall have the power to create their own sources of revenue and to levy taxes, fees, and charges subject to such guidelines and limitations as Congress may provide consistent with the basic policy of local autonomy." It is clear that Congress 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 Congress. (BAR 2001) a. Grant of local taxing power under the local government code b.Authority to prescribe penalties for tax violations c. Authority to grant local tax exemptions 1. May the deficiency business tax be paid in installments without surcharge and interest? Explain. (3%) SUGGESTED ANSWER: Yes. Local government units may, through ordinances duly approved, grant reliefs to taxpayers under such terms and conditions as they may deem necessary. Such reliefs may take the form of condonation or extension of time for payment or non-imposition of surcharge or interest. (Section 192, LGC). Accordingly, the deficiency business taxes may be paid in installment without surcharge and interest through the passage of an ordinance for that purpose. (BAR 2008) d.Withdrawal of exemptions e. Authority to adjust local tax rates f. Residual taxing power of local governments g. Authority to issue local tax ordinances Page | 198

1. In order to raise revenue for the repair and maintenance of the newly constructed City Hall of Makati, the City Mayor ordered the collection of P1.00, called “elevator tax", every time a person rides any of the high-tech elevators in the city hall during the hours of 8:00 a.m. to 10:00 a.m. and 4:00 p.m. to 6:00 p.m. Is the “elevator tax" a valid imposition? Explain. SUGGESTED ANSWER: No. The imposition of a tax, fee or charge or the generation of revenue under the Local Government Code shall be exercised by the Sanggunian of the local government unit concerned through an appropriate ordinance (Section 132 of the Local Government Code). The city mayor alone could not order the collection of the tax; as such, the “elevator tax” is an invalid imposition. (BAR 2003) 2.  An Ordinance was passed by the Provincial Board of a Province in the North, increasing the rate of basic real property tax from 0.006% to 1 % of the assessed value of the real property effective January 1, 2000. Residents 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? Explain your answer. (2%) SUGGESTED ANSWER: The protest is devoid of merit. No public hearing is required before the enactment of a local tax ordinance levying the basic real property tax (Art. 324, LGC Regulations).  ALTERNATIVE ANSWER: Yes, there is merit in the protest provided that sufficient proof could be introduced for the non-observance of public hearing. By implication, the Supreme Court recognized that public hearings are required to be conducted prior to the enactment of an ordinance imposing real property taxes. Although 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 Court should have ruled that the tax ordinance is invalid. (Belen Figuerres v. Court of Appeals, GRNo. 119172, March 25,1999). (BAR 2002) 3.

Local taxing authority a) Power to create revenues exercised through Local Government Units

1. In order to raise revenue for the repair and maintenance of the newly constructed City Hall of Makati, the City Mayor ordered the collection of P1.00, called “ elevator tax", every time a person rides any of the high-tech elevators in the city hall during the hours of 8:00 a.m. to 10:00 a.m. and 4:00 p.m. to 6:00 p.m. Is the “elevator tax" a valid imposition? Explain. SUGGESTED ANSWER: No. The imposition of a tax, fee or charge or the generation of revenue under the Local Government Code shall be exercised by the Sanggunian of the local government unit concerned through an appropriate ordinance (Section 132 of the Local Government Code). The city mayor alone could not order the collection of the tax; as such, the “elevator tax” is an invalid imposition. (BAR 2003) b) Procedure for approval and effectivity of tax ordinances 1.  An Ordinance was passed by the Provincial Board of a Province in the North, increasing the rate of basic real property tax from 0.006% to 1 % of the assessed value of the real property effective January 1, 2000. Residents of the municipalities of the said province protested the Ordinance on Page | 199

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? Explain your answer. (2%) SUGGESTED ANSWER: The protest is devoid of merit. No public hearing is required before the enactment of a local tax ordinance levying the basic real property tax (Art. 324, LGC Regulations).  ALTERNATIVE ANSWER: Yes, there is merit in the protest provided that sufficient proof could be introduced for the non-observance of public hearing. By implication, the Supreme Court recognized that public hearings are required to be conducted prior to the enactment of an ordinance imposing real property taxes. Although it was concluded by the highest tribunal that presumption of validity of a tax ordinance cannot 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 Court should have ruled that the tax ordinance is invalid. (Belen Figuerres v. Court of Appeals, GR No. 119172, March 25,1999). (BAR 2002) 4. 5.

Scope of taxing power Specific taxing power of Local Government Units a. Taxing powers of provinces (1) Tax on transfer of real property ownership (2) Tax on business of printing and publication (3) Franchise tax

1. The Local Government Code took effect on January 1, 1992. PLDT’s legislative franchise was granted sometime before 1992. Its franchise provides that PLDT will only pay 3% franchise tax in lieu of all taxes. The legislative franchises of Smart and Globe Telecoms were granted in 1998. Their legislative franchises state that they will pay only 5% franchise tax in lieu of all taxes.

The Province of Zamboanga del Norte passed an ordinance in 1997 that imposes a local franchise tax on all telecommunication companies operating within the province. The tax is 50% of 1% of the gross annual receipts of the preceding calendar year based on the incoming receipts, or receipts realized, within its territorial jurisdiction. Is the ordinance valid? Are PLDT, Smart and Globe liable to pay franchise taxes? Reason briefly. SUGGESTED ANSWER: The ordinance is valid. The Local Government Code explicitly authorizes provincial governments, notwithstanding any law or other special law, to impose a tax on business enjoying a franchise at the rate of 50% of 1% based on the gross annual receipts during the preceding year within the province. (Section 137, LGC). PLDT is liable to the franchise tax levied by the province of Zamboanga del Norte. The tax exemption privileges on franchises granted before the passage of the Local Government Code are effectively repealed by the latter law. (PLDT v. City of Davao, 363 SCRA 522 12001J). Smart and Globe, however, are not liable to the franchise tax imposed under the provincial ordinance. The legislative franchises of Smart and Globe were granted in 1998, long after the Local Government Code took effect. Congress is deemed to have been aware of the provisions of the earlier law. When it granted the Page | 200

exemption. Accordingly, the latest will of the legislature to grant tax exemption must be granted. (BAR 2007) (4) Tax on sand, gravel and other quarry services (5) Professional tax 1. The City of Manila enacted Ordinance No. 55-66 which imposes a municipal occupation tax on persons practicing various professions in the city. Among those subjected to the occupation tax were lawyers. Atty. Mariano Batas, who has a law office in Manila, pays the ordinance-imposed occupation tax under protest. He goes to court to assail the validity of the ordinance for being discriminatory. Decide with reasons. (3%) SUGGESTED ANSWER: The ordinance is valid. The tax imposed by the ordinance is in the nature of a professional tax which is authorized by law to be imposed by cities (Section 151 in relation to Section 139, LGC). The ordinance is not discriminatory because the City Council has the power to select the subjects of taxation and impose the same tax on those belonging to the same class. The authority given by law to cities is to impose a professional tax only on persons engaged in the practice of their profession requiring government examination and lawyers are included within that class o f professionals. (BAR 2009) 2. Mr. Fermin, a resident of Quezon City, is a Certified Public Accountant- Lawyer engaged in the Practice of his two professions. He has his main office in Makati City and maintains a branch office in Pasig City. Mr. Fermin pays his professional tax as a CPA in Makati City and his professional tax as a lawyer in Pasig City. a. May Makati City, where he has his main office, require him to pay his professional tax as a lawyer? Explain. b. May Quezon City, 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 CPA and a lawyer? Explain. (5%) SUGGESTED ANSWER: a. No. Mr. Fermin is given the option to pay either in the city where he practices his profession or where he maintains his principal office in case he practices his profession in several places. The professional tax paid as a lawyer in Pasig City, a place where he practices his profession, will entitle him to practice his profession in any part of the Philippines without being subjected to any other national or local tax, license, or fee for the practice of such profession. (Sec. 139 in relation to 151, Local Government Code). b. No. The professional tax shall be paid only once for every taxable year and the payment shall be made either in the city where he practices his profession or where he maintains his principal office. The city of residence cannot require him to pay his professional taxes. (Sec. 139 in relation to Sec. 151, Local Government Code). (BAR 2005) (6) Amusement tax (7) Tax on delivery truck/van b.Taxing powers of cities c. Taxing powers of municipalities 1. The Municipality of Malolos passed an ordinance imposing a tax on any sale or transfer of real property located within the municipality at a rate of one-fourth (1/4) of one percentum (1%) of the total consideration of such transaction. X sold a parcel of land in Malolos which he inherited from his deceased parents and refused to pay the aforesaid tax. He instead filed appropriate case asking that the ordinance be declared null and void since such a tax can only be collected by the national government, as in fact he has paid BIR the required capital gains tax. The Municipality countered that under the Constitution, each local government is vested with the power to create its own sources of revenue and to levy taxes, and it imposed the subject tax in the exercise of said Page | 201

constitutional authority. Resolve the controversy.  ANSWER: The ordinance passed by the Municipality of Malolos imposing a tax on the sale or transfer of real property is void. The Local Tax Code only allows provinces and cities to impose a tax on the transfer of ownership of real property (Sec. 7 and Sec. 23, Local Tax Code). Municipalities are prohibited from imposing said tax that provinces are specifically authorized to levy. (Sec. 22, Local Tax Code) . While it is true that the Constitution has given broad powers of taxation to local government units, this delegation, however, is subject to such limitations as may be provided by law (Sec. 5, Art X, 1987 Constitution). (BAR 1991) (1) Tax on various types of businesses (2) Ceiling on business tax impossible on municipalities within Metro Manila (3) Tax on retirement on business 1. How are retiring businesses taxed under the Local Government Code? (2%) SUGGESTED ANSWER: Retiring business under the LGC are taxed on their gross sales or gross receipts in the current year and not on the preceding year. If the tax paid in the current year is less than the tax due on gross sales or receipts of the current year, the difference shall be paid before the business is considered officially retired (Sec. 145, LGC). (4) Rules on payment of business tax 1. What is the basis for the computation of business tax on contractors under the local government code? (2%) SUGGESTED ANSWER: The business tax on contractors is a graduated annual fixed tax based on the gross receipts for the preceding calendar year. However, when the gross receipts amount to P2 million or more, the business tax on contractors is imposed as a percentage tax at the rate of 50% of 1% (Sec. 143(e), LGC). 2. Ferremaro, Inc., a manufacturer of handcrafted shoes, maintains its principal office in Cubao, Quezon City. It has branches/sales offices in Cebu and Davao. Its factory is located in Marikina City where most of its workers live. Its principal office in Quezon City is also a sales office. Sales of finished products for calendar year 2009 in the amount of P10 million were made at the following locations: Cebu branch Davao branch Quezon City branch Total

25% 15% 60% 100%

Where should the applicable local taxes on the shoes be paid? Explain. (3%) SUGGESTED ANSWER: Twenty five percent (25%) of total sales or P2.5 million shall be taxed in Cebu, and 15% of total sales or PI.5 million shall be taxed in Davao. For the remaining 60% sales amounting to P6 million which are recorded in the principal office, 30% thereof or P1.8 million is taxable in Quezon City where the principal office is located and 70% or P4.2 million is taxable in Marikina City where the factory is located. Page | 202

Under the law, manufacturers maintaining a branch or sales outlet shall record the sale in the branch or sales outlet making the sale and pay the tax in the city or municipality where the branch or sales outlet is located. Since Ferremaro, Inc., maintains one factory, the sales recorded in the principal office shall be allocated and 30% of said sales are taxable in the place where the principal office is located while 70% is taxable in the place where the factory is located (Sec. 150, LGC). (5) Fees and charges for regulation & licensing 1. The Sangguniang Bayan of the Municipality of Sampaloc, Quezon, passed an ordinance imposing a storage fee of ten centavos (PO. 10) for every 100 kilos of copra deposited in any bo dega within the Municipality’s jurisdiction. The Metropolitan Manufacturing Corporation (MMC), with principal office in Makati, is engaged in the manufacture of soap, edible oil, margarine, and other coconut oil-based products. It has a warehouse in Sampaloc, Quezon, used as storage space for the copra purchased in Sampaloc and nearby towns before the same is shipped to Makati. MMC goes to court to challenge the validity of the ordinance, demanding the refund of the storage fees it paid under protest. Is the ordinance valid? Explain your answer. (4%) SUGGESTED ANSWER: Yes. The municipality is authorized to impose reasonable fees and charges as a regulatory measure in an amount commensurate with the cost of regulation, inspection and licensing (Section 147, LGC). In the case at bar, the storage of copra in any warehouse within the municipality can be the proper subject of regulation pursuant to the police power granted to municipalities under the Revised Administrative Code or the “general welfare clause”. A warehouse used for keeping or storing copra is an establishment likely to endanger the public safety or likely to give rise to conflagration because the oil content of the copra, when ignited, is difficult to put under control by water and the use of chemicals is necessary to put out the fire. It is, thus, reasonable that the Municipality impose storage fees for its own surveillance and lookout (Procter & Gamble Philippine Manufacturing Corporation v. Municipality of Jagna, Province of Bohol, 94 SCRA 894 [1979]). (BAR 2009) 2. The City of Manila enacted an ordinance, imposing a 5% tax on gross receipts on rentals of space in privately- owned public markets. BAT Corporation questioned the validity of the ordinance, stating that the tax is an income tax, which cannot be imposed by the city government. Do you agree with the position of BAT Corporation? Explain. (5%) SUGGESTED ANSWER: No. The tax imposed is not an income tax but a license tax or fee for the regulation of the business in which the taxpayers are engaged, that is the leasing of spaces in privately-owned public markets. (Progressive Development Corporation v. Quezon City, 172 SCRA 629 [1989]). The income tax imposed under the National Internal Revenue Code which preempts the imposition by the City is one which is imposed on the privilege enjoyed by a taxpayer in earning income and not a tax on business. (BAR 2008) (6) Situs of tax collected d.Taxing powers of barangays e. Common revenue raising powers (1) Service fees and charges (2) Public utility charges (3) Toll fees or charges f. Community tax 6. Common limitations on the taxing powers of LGUs 1. XYZ Shipping Corporation is a branch of an international shipping line with voyages between Manila and the West Coast of the U.S. The company’s vessels load and unload cargoes at the Port of Page | 203

Manila, albeit it does not have a branch or sales office in Manila. All the bills of lading and invoices are issued by the branch office in Makati which is also the company’s principal office. The City of Manila enacted an ordinance levying a 2% tax on gross receipts of shipping lines using the Port of Manila. Can the City Government of Manila legally impose said levy on the corporation? Explain. (3%) SUGGESTED ANSWER: No, Manila cannot legally levy the 2% Gross Receipts Tax on the shipping line, because taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water is a limitation on the exercise of taxing powers by local government units (Sec, 133(f), LGC). 2. The Municipality of Argao, Province of Cebu passed a tax ordinance requiring all professionals practicing in the municipality to pay a tax equivalent to two (2%) percent of their gross income. A certified true copy of the ordinance was sent to the Secretary of Finance for review on 1 March 1989 and was received by him on the same day. On 15 August 1989, even as the tax ordinance remained unacted upon by the Secretary of Finance, the municipality started collecting the tax in question. The members of the Philippine Bar in the municipality questioned the legality of the ordinance and sought the suspension of the collection of the tax but the municipality argued that since the Secretary has not taken any action on the ordinance for more than one hundred twenty days after his receipt thereof, the legality of the ordinance can no longer be questioned and insisted on the collection of the tax. Is the tax ordinance in question legal?  ANSWER: No. the tax ordinance is not legal as the Local Tax Code allows provinces and cities, to the exclusion of municipalities, to impose an annual occupation tax on all persons engaged in the exercise or practice of their profession or calling in specified amounts which in the case of lawyers is P75.00 per annum (Secs. 11 and 12 in relation to Sec. 23, Local Tax Code). A person authorized to practice his profession or calling shall pay the tax to the province where he practices his profession or calling or maintains his office. No local government unit can impose a tax on income (Sec. 5, Local Tax Code). Is the Municipality correct in insisting on collecting the tax?  ANSWER: No, the Municipality was incorrect in insisting on the collection of the tax. Once the tax on occupation is paid as stated in paragraph (a), above, the lawyer is entitled to practice his profession or calling in all parts of the Philippines without being subject to any other national or local tax, license or fee for the practice of such profession or calling. Will the inaction of the Secretary of Finance bar the professionals in the Municipality from questioning the legality of that ordinance?  ANSWER: The inaction of the Secretary of Finance does not bar the professionals in the Municipality from questioning the legality of the ordinance. While it is true that the Secretary of Finance may himself suspend the tax ordinance within a 120-day period from receipt thereof, his failure to do so, however, has no preclusive effect on taxpayers who may be adversely affected by the ordinance. (BAR 1991) 7.

Collection of business tax a. Tax period and manner of payment Page | 204

1. MNO Corporation was organized on July 1, 2006, to engage in trading of school supplies, with principal place of business in Cubao, Quezon City. Its books of accounts and income statement showing gross sales as follows: July 1, 2006 to December 31, 2006 January 1, 2007 to June 30, 2007 JULY 1, 2007 TO DECEMBER 31, 2007

P 5,000,000 P10,000,000 PI 5,000,000

Since MNO Corporation adopted fiscal year ending June 30 as its taxable year for income tax purposes, it paid its 2% business tax for fiscal year ending June 30, City Treasurer assessed the corporation for deficiency business tax for 2007 based on gross sales of P25 million alleging that local business taxes shall be computed based on calendar year. Is the position of the city treasurer tenable? Explain. (3%) SUGGESTED ANSWER: Yes. The tax period for local taxes is generally the calendar year. (Section 165, LGC). (BAR 2008)

b.Accrual of tax c. Time of payment d.Penalties on unpaid taxes, fees or charges e. Authority of treasurer in collection and inspection of books 8. Taxpayer’s remedies 1. Judicial 1. X, a taxpayer who believes that an ordinance passed by the City Council of Pasay is unconstitutional for being discriminatory against him, want to know from you, his tax lawyer, whether or not he can file an appeal. In the affirmative, he asks you where such appeal should be made: the Secretary of Finance, or the Secretary of Justice, or the Court of Tax Appeals, or the regular courts. What would your advice be to your client, X? SUGGESTED ANSWER: The appeal should be made with the Secretary of Justice. Any question on the constitutionality or legality of a tax ordinance may be raised on appeal with the Secretary of Justice within 30 days from the effectivity thereof. (Sec. 187, LGC; Hagonoy Market Vendor Association v. Municipality of Hagonoy, 376 SCRA 376 [ 2002]). (BAR 2003) 2. Administrative 1. The Municipality of Argao, Province of Cebu passed a tax ordinance requiring all professionals practicing in the municipality to pay a tax equivalent to two (2%) percent of their gross income. A certified true copy of the ordinance was sent to the Secretary of Finance for review on 1 March 1989 and was received by him on the same day. On 15 August 1989, even as the tax ordinance remained unacted upon by the Secretary of Finance, the municipality started collecting the tax in question. The members of the Philippine Bar in the municipality questioned the legality of the ordinance and sought the suspension of the collection of the tax but the municipality argued that since the Secretary has not taken any action on the ordinance for more than one hundred twenty days after his receipt thereof, the legality of the ordinance can no longer be questioned and insisted on the collection of the tax. What remedies are available to the taxpayer to enable him to question the legality of that Page | 205

ordinance?  ANSWER: The taxpayer may pursue his remedies either administratively or Judicially. He may, as the case warrants, file a formal protest with the Secretary of Finance or query with the Provincial Fiscal whose opinion is appealable to the Secretary of Justice whose decision may be contested in the proper court. The other remedy would be to file a special civil action for declaratory relief (if circumstances still warrant) or to pay the tax and thereafter to file an action for refund within six (6) years after such payment.  ALTERNATIVE ANSWER: On the basis of the facts of the problem. It would appear that the administrative remedy is no longer available since there is already an attempt to enforce collection. The only remedy of the taxpayer is to pay the tax and sue for its recovery in the ordinary court. (BAR 1991) a. Periods of assessment and collection of local taxes, fees or charges b.Protest of assessment 1. On May 15, 2009, La Manga Trading Corporation received a deficiency business tax assessment of PI,500,000.00 from the Pasay City Treasurer. On June 30, 2009, the corporation contested the assessment by filing a written protest with the City Treasurer. On October 10, 2009, the corporation received a collection letter from the City Treasurer, drawing it to file on October 25, 2009 an appeal against the assessment before the Pasay Regional Trial Court (RTC).  A. Was the protest of the corporation filed on time? Explain. (3%) SUGGESTED ANSWER: The protest was filed on time. The taxpayer has the right to protest an assessment within 60 days from receipt thereof (Sec. 195, LGC). B. Was the appeal with the Pasay RTC filed on time? Explain. (3%) SUGGESTED ANSWER: The appeal was not filed on time. When an assessment is protested, the treasurer has 60 days within which to The taxpayer has 30 days from receipt of the denial of the protest or from the lapse of the 60 -day period decide, whichever comes first, otherwise the assessment becomes conclusive and unappeallable. Since no decision on the protest was made, the taxpayer should have appealed to the RTC within 30 days from the lapse of the period to decide the protest (Sec. 195, LGC). c. Claim for refund of tax credit for erroneously or illegally collected tax, fee or charge 9. Civil remedies by the LGU for collection of revenues a. Local government’s lien for delinquent taxes, fees or charges b.Civil remedies, in general 1. Give the remedies available to local government units to enforce the collection of taxes, fees, and charges?  ANSWER: The remedies available to the local government units to enforce collection of taxes, fees, and charges are: (a) Administrative remedies of distraint of personal property of whatever kind whether tangible or intangible, and levy of real property and interest therein; and Page | 206

(b) Judicial remedy by institution of an ordinary civil action for collection with the regular courts of proper jurisdiction. (BAR 1997) (1) Administrative action (2) Judicial action

B. Real property taxation 1. Fundamental principles 1. Give at least two (2) 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. (2%) SUGGESTED ANSWER: Two (2) fundamental principles governing real property taxation are: 1) The appraisal must be at the current and fair market value; and 2) Classification for assessment must be on the basis of actual use. (Sec. 198, Local Government Code)  ALTERNATIVE ANSWER: The examinee should be given credit if he chooses the above two (2) or any two (2) of those enumerated below: 1) Assessment must be on the basis of uniform classification; 2) Appraisal, assessment, levy and collection shall not be let to private persons; and 3) Appraisal and assessment must be equitable. (Sec. 198, Local Government Code) (BAR 2000) 2. State the fundamental principles underlying real property taxation in the Philippines.  ANSWER: The following are the fundamental principles governing real property taxation: (a) Real property shall be appraised at its current and fair market value; (b) Real property shall be classified for assessment purposes on the basis of its actual use: (c) Real property shall be assessed on the basis of a uniform classification within each local government unit; (d) The appraisal, assessment, levy, and collection of real property tax shall not be let to any private person; and (e) The appraisal and assessment of real property shall be equitable. (BAR 1997) 2. 3.

Nature of real property tax Imposition of real property tax

1. Under Article 415 of the Civil Code, in order for machinery and equipment 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 works carried on by the owner. Oil companies install underground tanks in the gasoline stations located on land leased by the oil companies from the owners of the land where the gasoline stations [are] located. Are those underground tanks, 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 Government Code? Explain. SUGGESTED ANSWER: Page | 207

Yes. The properties are considered as necessary fixtures of the gasoline station, without which the gasoline station would be useless. Machinery and equipment installed by the lessee of leased land is not real property for purposes of execution of a final judgment only. They are considered as real property for real property tax purposes as “other improvements to affixed or attached real property under the Assessment Law and the Real Property Tax Code. (Cattex v. Central Board of Assessment Appeals, 114 SCRA 296 [1982]). (BAR 2003) 2.  Aside from the basic real estate tax, give three (3) other taxes which may be imposed by provincial and city governments as well as by municipalities in the Metro Manila area. (3%) SUGGESTED ANSWER: The 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 Metro Manila area: 1. Additional levy on real property for the Special Education Fund (Sec. 235, LGC); 2. Additional Ad-valorem tax on Idle lands (Sec. 236, LGC); and 3. Special levy (Sec, 240), Note: The question is susceptible to dual interpretation because it is asking for three other taxes and not three other real property taxes. Accordingly, an alternative answer should be considered and given full credit.  ALTERNATIVE ANSWER: The following taxes, aside from basic real estate tax, may be imposed by Provincial Government: a. Printer’s or publisher’s tax b. Franchise Tax c. Professional tax City Government - may levy taxes which the province or municipality are authorized to levy (Sec. 151, LGC) a. Printer’s or publisher’s tax b. Franchise tax c. Professional tax Municipalities in the Metro Manila Area - may levy taxes at rates which shall not exceed by 50% the maximum rates prescribed in the Local Government Code. a. Annual fixed tax on manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers and compounders of liquors, distilled spirits, and wines or manufacture of any article of commerce of whatever kind or nature; b. Annual fixed tax on wholesalers, distributors, or dealers in any article of commerce of whatever kind or nature; c. Percentage tax on retailers Note: Other taxes may comprise the enumeration because many other taxes are authorized to be imposed by LGUs. (BAR 2002) 3. Under Article 415 of the Civil Code, in order for machinery and equipment 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 works carried on by the owner. Oil companies, such as Caltex and Shell, install underground tanks in the gasoline stations located on land leased by the oil companies from others. Are those underground tanks which were not placed there by the owner of Page | 208

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 Government Code? Explain your answer. (5%) SUGGESTED ANSWER: Yes. The underground tanks although installed by the lessee. Shell and Caltex, are considered as real property for purposes of the imposition of real property taxes. It is only for purposes of executing a final judgment that these machinery and equipment, installed by the lessee on a leased land, would not be considered as real property. But in the imposition of the real property tax, the underground tanks are taxable as necessary fixtures of the gasoline station without which the gasoline station would not be operational. (Caltex Phils., Inc v. CBAA, 114 SCRA 296). (BAR 2001) 4. May 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 jurisdictions? (3%) SUGGESTED ANSWER: Not all local government units may do so. Only provinces, cities, and municipalities within the Metro Manila area (Sec. 232, Local Government Code),may impose an ad valorem tax not exceeding five percent (5%) of the assessed value (Sec.236, Ibid.) of idle or vacant residential lots in a subdivision, duly approved by proper authorities regardless of area. (Sec. 237, Ibid.) (BAR 2000) 5. In view of the street widening and cementing of roads and the improvement of drainage and sewers in the district of Ermita, the City Council of the City of Manila passed an ordinance imposing and collecting a special levy on lands in the district. Jose Reyes, a landowner and resident of Ermita, submitted a protest against the special levy fifteen (15) days after the last publication of the ordinance alleging that the special levy was exorbitant since the rate thereof was more than the maximum rate of two (2%) percent of the assessed value of the real properties allowed by Section 39 of P.D. 464, as amended.  Assuming that Jose Reyes is able to prove that the rate of the special levy is more than the aforesaid percentage limitation of 2%, will his protest prosper?  ANSWER: The special levy under the Real Property Tax Code on lands, specially benefited by the proposed infrastructure, may not exceed sixty per cent (60%) of the cost of said improvement. All lands comprised within the district benefited are subject to the special levy except lands exempt from the real property tax (Sec. 47. RPT). The protest shall be filed not later than 30 days after the publication of the ordinance and may be submitted to the City Sanggunian signed by a majority of the landowners affected by the proposed work. If no such protest is filed in the manner above specified, the city ordinance shall become final and effective. The levy imposed under the ordinance should be within the limit of sixty percent (60%) of the total cost of the proposed improvement. The rate of two percent (2%) of the assessed value under Sec. 39 of P.D. 464refers to the real property tax and not to special levies. (BAR 1991) a. Power to levy real property tax 1.  A city outside of metro manila plans to enact an ordinance that will impose a special levy on idle lands located in residential subdivisions within its territorialjurisdiction in addition to the basic real property tax. If the lot owners of a subdivision located in the said c ity seek your legal advice on the matter, what would your advice be? Discuss. (5%) SUGGESTED ANSWER: My advice would be that the city's plan to enact an ordinance that will impose such special levy on idle lands is not legally allowed, unless these lands are specially benefited by a public works projects or improvements funded by the city government. (Sec. 240, Local Government Code). I will likewise advise Page | 209

them that before the city council could enact an ordinance imposing a special levy, it shall conduct a public hearing thereon; notify in writing the owners of the real property to be affected or the persons having legal interest therein as to the date and place thereof and afford the latter the opportunity to express their positions or objections relative to the proposed ordinance. (Sec. 242, Local Government Code).  ANOTHER SUGGESTED ANSWER: I would advise the lot owners that the imposition is valid because a city, even if it is outside Metro Manila, may levy an annual tax on idle lands at the rate not exceeding five percent (5%) of the assessed value of the property which shall be in addition to the basic real property tax. (Sec. 236, Local Gov't. Code) I would likewise 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. (last par., Sec. 237, ibid.) Finally, I would advise them to construct or place improvements on their idle lands by making valuable additions to the property or ameliorations in the land ’s conditions so the lands would not be considered as idle. (Sec. 199(m), ibid.) In this manner their properties would not be subject to the ad valorem tax on idle lands. Note: The special levy referred to in the problem might be interpreted by the examinee in two ways: (l) An additional Ad valorem tax on idle lands (Sec. 236, LGC) or: (2) Special levy by Local Government Units (Sec. 240, LGC). This is so because both provisions fall under Chapter V of the local Government Code dealing with Real Property Taxation. The caption or heading used in Chapter V upon which both impositions fall is "Special Levies on Real Property”. Hence, it is requested that any of foregoing suggested answers should be given full credit. (BAR 2005) b.Exemption from real property tax 1.  A inherited a two-storey building in Makati from his father, a real estate broker in the ‘bOs. A group of Tibetan monks approached A and offered to lease the building in order to use it as a venue for their Buddhist rituals and ceremonies. A accepted the rental of PI million for the whole year. The following year, the City Assessor issued an assessment against A for non-payment of real property taxes. Is the assessor justified in assessing A’s deficiency real property taxes? Explain. (3%)

SUGGESTED ANSWER: No. The property is exempt from real property tax by virtue of the beneficial use thereof by the Tibetan monks for their religious rituals and ceremonies. A property that is actually, directly and exclusively used for religious purposes is exempt from the real property tax (Sec. 234, LGC; Sec. 28(3), Article IV, Phil. Constitution). The test of exemption from the tax is not ownership but the beneficial use of the property (City of Baguio v. Busuego, L-29772, Sept. 18, 1980). 2. What properties are exempt from the real property tax? 5% SUGGESTED ANSWER: The following properties are exempt from the real property tax: a. Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted for consideration or otherwise to a taxable person;

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b. Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educational purposes; c. All machineries and equipment that are actually, directly and exclusively used by local water utilities and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power; d. All real property owned by duly registered cooperatives as provided for under R.A. 6938; and e. Machinery and equipment used for pollution control and environmental protection. [Sec. 234, LGC] (BAR 2006) 3. The Constitution provides “ charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and 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." This provision exempts charitable institutions and religious institutions from what kind of taxes? Choose the best answer. Explain. 5% f. g. h. i. j.

from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and real property tax from income tax only from value-added tax only from real property tax only from capital gains tax only

SUGGESTED ANSWER: I choose (d), from real property tax only. This is the connotation of the phrase “and all lands, buildings and improvements" thereby limiting the exemption to real property taxes only (CIRv. CA, 298 SCRA 83 [1998]; Lladoc v. Commissioner, 14 SCRA 292 [1967]; Hodges v. Municipal Board of Iloilo City, 19 SCRA 28 [1965]). (BAR 2006) 4. The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac province. The southern side and middle part are occupied by the Church and a convent, the eastern side by a school run by the Church itself, the southeastern side by some commercial establishments, while the rest of the property, in particular the northwestern side, is idle or unoccupied. May the Church claim tax exemption on the entire land? Decide with reasons. (5%) SUGGESTED ANSWER: No. The portions of the land occupied and used by the church, convent and school run by the church are exempt from real property taxes while the portion of the land occupied by commercial establishments and the portion, which is idle, are subject to real property taxes. The “usage” of the p roperty and not the “ownership" is the determining factor whether or not the property is taxable. [Lung Center of the Philippines v. Q.C., 433 SCRA 119 (2004)]. (BAR 2005) 5. Under the Local Government Code, what properties are exempt from real property taxes? (5%) SUGGESTED ANSWER: The following properties are exempt from real property taxes: (Sec. 234, LGC). 1. Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person; 2. All lands, buildings and improvements actually, directly, and exclusively used for religious, charitable or educational purposes by charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, nonprofit or religious cemeteries; Page | 211

3. All machineries and equipment 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 and/or generation and transmission of electric power; 4. All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and 5. Machinery and equipment used for pollution control and environmental protection. (BAR 2002)

6.  Article VII, Section 28 (3) of the 1987 Philippine Constitution provides that charitable institutions, churches and personages or covenants appurtenant thereto, mosques, 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. To what kind of tax does this exemption apply? (2%) SUGGESTED ANSWER: This 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. (Commissioner of Internal Revenue v. Court of Appeals, et aL, G.R. No. 124043, October 14, 1998). ( Is proof of actual use necessary for tax exemption purposes under the Constitution? (3%) SUGGESTED ANSWER: Yes, because tax exemptions are strictly construed against the taxpayer. There must be evidence to show that the taxpayer has complied with the requirements for exemption. Furthermore, real property taxation is based on use and not on ownership, hence the same rule must also be applied for real property tax exemptions. BAR 2000) 7. The Constitution exempts from taxation charitable institutions, churches, parsonages or convents appurtenant thereto, mosques and non-profit cemeteries and lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes. Mercy Hospital is a 100-bed hospital organized for charity patients. Can said hospital claim exemption from taxation under the above-quoted constitutional provision? Explain.  ANSWER: Yes. Mercy Hospital can claim exemption from taxation under the provision of the Constitution, but only with respect to real property taxes provided that such real properties are used actually, directly and exclusively for charitable purposes. (BAR 1996) 4.

Appraisal and assessment of real property tax a. Rule on appraisal of real property at fair market value b.Declaration of real property c. Listing of real property in assessment rolls d.Preparation of schedules of fair market value (1) Authority of assessor to take evidence (2) Amendment of schedule of fair market value e. Classes of real property f. Actual use of property as basis of assessment Page | 212

1. Republic Power Corporation (RPC) is a government- owned and controlled corporation engaged in the supply, generation and transmission of electric power. In 2005, in order to provide electricity to Southern Tagalog provinces, RPC entered into an agreement with Jethro Energy Corporation (JEC), for the lease of JEC’s power barges which shall be berthed at the port of Batangas City. The contract provides that JEC shall own the power barges and the fixtures, fittings, machinery, and equipment therein, all of which JEC shall supply at its own cost, and that JEC shall operate, manage and maintain the power barges for the purpose of converting the fuel of RPC into electricity. The contract also stipulates that all real estate taxes and assessments, rates and other charges, in respect of the power barges, shall be for the account of RPC. In 2007, JEC received an assessment of real property taxes on the power barges from the Assessor of Batangas City. JEC sought reconsideration of the assessment on the ground that the power barges are exempt from real estate taxes under Section 234 [c] of R.A. 7160 as they are actually, directly and exclusively used by RPC, a government-owned and controlled corporation. Furthermore, even assuming that the power barges are subject to real property tax, RPC should be held liable therefore, in accordance with the terms of the lease agreement. Is the contention of JEC correct? Explain your answer. (4%) SUGGESTED ANSWER: The contention of JEC is not correct. The owner of the power barges is JEC which is required to operate, manage and maintain the power barges for the purpose the claim that RPC, a government-owned and controlled corporation engaged in the supply, generation and transmission of electric power, is the actual, direct and exclusive user of the barge, hence, does not fall within the purview of the exempting provision of Section 234[c] of R.A. 7160. Likewise, the argument that RPC should be liable to the real property taxes consonant with the contract is devoid of merit. The liability for the payment of the real estate taxes is determined by law and not by the agreement of the parties (FELS Energy Inc. P. The Province of Batangas, 516 SCRA 186 [2007]). (BAR 2009) 2. The real property of Mr. and Mrs Angeles, situated in a commercial area in front of the public market, was declared in their Tax Declaration as residential because it had been used by them as their family residence from the time of its construction in 1990. However, since January 1997, when the spouses left for the United States to stay there permanently with their children, the property has been rented to a single proprietor engaged in the sale of appliances and agriproducts. The Provincial Assessor reclassified the property as commercial for tax purposes starting January 1998. Mr. and Mrs Angeles appealed to the Local Board of Assessment Appeals, contending that the Tax Declaration previously classifying their property as residential is binding. How should the appeal be decided? (5%) SUGGESTED ANSWER: The appeal should be decided against Mr. and Mrs. Angeles. The law focuses on the actual use of the property for classification, valuation and assessment purposes regardless of ownership. Section 217 of the Local Government Code provides that “real property shall be classified, valued, and assessed on the basis of its actual use regardless of where located, whoever own s it, and whoever uses if’. Whenever the decision of the Collector of Customs is adverse to the government, it is automatically elevated to the Commissioner for review and, if it is affirmed by him, it is automatically elevated to the Secretary of Finance for review. (BAR 2002) g. Assessment of real property (1) Assessment levels (2) General revisions of assessments and property classification (3) Date of effectivity of assessment or reassessment (4) Assessment of property subject to back taxes Page | 213

(5) Notification of new or revised assessment h.Appraisal and assessment of machinery 5. Collection of real property tax a. Date of accrual of real property tax and special levies b.Collection of tax (1) Collecting authority (2) Duty of assessor to furnish local treasurer with assessment rolls (3) Notice of time for collection of tax c. Periods within which to collect real property tax d.Special rules on payment (1) Payment of real property tax in installments (2) Interests on unpaid real property tax (3) Condonation of real property tax e. Remedies of LGUs for collection of real property tax (1) Issuance of notice of delinquency for real property tax payment 1. Quezon City published on January 30, 2006 a list of delinquent real property taxpayers in 2 newspapers of general circulation and posted this in the main lobby of the City Hall. The notice requires all owners of real properties in the list to pay the real property tax due within 30 days from the date of publication, otherwise the properties listed shall be sold at public auction. Joachin is one of those named in the list. He purchased a real property in 1996 but failed to register the document of saile with the Register of Deeds and secure a new real property tax declaration in his name. He alleged that the auction sale of his property is void for lack of due process considering that the City Treasurer did not send him personal notice. For his part, the City Treasurer maintains that the publication and posting of notice are sufficient compliance with the requirements of the law. 1.

If you were the judge, how will you resolve this issue? 2.5%

2. Assuming Joachin is a registered owner, will your answer be the same? 2.5% SUGGESTED ANSWER: 1. I will resolve the issue in favor of the City Treasurer. For purposes of the real property tax, the registered owner of the property is deemed the taxpayer. Hence, only the registered owner is entitled to a notice of tax delinquency and other proceedings relative to a tax sale (Talusan v. Tayag and Hernandez, 356 SCRA 263 [2001]). Not being the registered owner of the property, Joachin cannot claim to have been deprived of such notice, in fact, he was not entitled to it. He brought the misfortune upon himself, because he did not register the Deed of Sale with the Register of Deeds upon its execution or secure a tax declaration in his name. He did not take the necessary steps to protect and legitimize his interest. The auction sale of his property is, therefore, valid. 2.

No, my answer will not be the same. The law requires that a notice of the auction sale must be properly sent to the registered owner. A mere publication of the notice of delinquency would not suffice, considering that the procedure in tax sales is in personam. An auction sale, although preceded by advertisement and publication but without an actual notice to the delinquent taxpayer, is void. (Tan v. Bantegui, 473 SCRA 663 [2005]; Estate of Mercedes Jacob v. CA, 283 SCRA 474 [19971). (BAR 2006) (2) Local government’s lien (3) Remedies in general

1. Ms. Edna Dinoso is the registered owner of a residential lot with a two-story house situated in Naga City. The lot with an area of328 sq. meter is described and covered by TCT No. 4739 of the Registry of Deeds of Naga City. Page | 214

On September 12. 1977, a 115 sq. meter portion of Edna’s property was expropriated by the Republic of the Philippines for the sum of P6.700.00 representing the assessed value of the aforesaid portion: This amount was deposited by the Government in Edna’s account. For almost ten (10) years, Edna failed to pay her real estate taxes on the same property. Thus, on November 5, 1977, her property was sold at public auction by the City Treasurer of Naga City to satisfy her real estate tax delinquencies amounting to P5,800.00. The highest bidder for the property was Angel Chua. Edna was not present at the public auction although she later admitted having received the notice of hearing for the petition for entry of a new certificate of title by Angel Chua. (Both the auction sale and the final bill of sale were annotated at the back of TCT No. 4739 by the Register of Deeds.)

On March 15, 1979, Edna filed a complaint to annul the auction sale which was denied by the CFI Judge of Naga City. In fact, the CFI Judge ordered the TCT # 4739 of Edna be cancelled and that a new title be issued to Angel Chua. On appeal, the Court of Appeals affirmed the CFI decision in toto. Edna then elevated the case to the Supreme Court citing several grave errors of law, among which are: 1)

2) 3)

That her tax delinquencies (involving P5,800.00) for non-payment of real estate taxes were offset by the sum of P6,700.00which the government of the Philippines owed her. She claims that her tax delinquencies have been extinguished by legal compensation: That the price of P5,800.00 paid by Angel Chua was grossly inadequate and that because of its inadequacy, the same is tantamount to deprivation of property without due process of law; That the public auction made on her property is void.

Discuss the merits of the appeal.  ANSWER: 1) The decision of the Court of Appeals affirming the CFI decision must be affirmed. On the procedural aspect, it has not been shown, as required under the Real Property Tax Code that plaintiff has paid the amount for which the real property has been sold plus interest. On the claim of extinction of tax liability by legal compensation, there is jurisprudence to the effect that the doctrine of equitable recoupment does not apply in this Jurisdiction. Assuming it does, the facts of the case bear out that the Government does not owe the plaintiff any amount. 2) On the claim that the price for the property was grossly inadequate, the Real Property Tax Code

specifically mentions that the sale of real property at public auction is “to satisfy all the taxes and penalties due and costs of sale" (Sec. 73). Thus, the selling price is based not on the fair market value of the property sold at public auction but the amount of real property taxes due thereon. In any case, the delinquent taxpayer is given one year from the date of registration of the sale within which to redeem the property by paying the taxes due plus costs and interest. 3)

On the claim that the public auction made on the property is void, the Real Property Tax Code provides (Sec. 83,2nd par.) that a court shall not declare a sale invalid due to irregularities in the proceedings unless such irregularities have impaired the substantial rights of the taxpayer. In the case at bar, the plaintiff received a notice of hearing for the petition for entry of a new certificate of title during which she could have questioned any irregularity in the conduct of the sale. (BAR 1992) (4) Resale of real estate taken for taxes, fees or charges (5) Further levy until full payment of amount due 6. Refund or credit of real property tax Page | 215

a. Payment under protest b.Repayment of excessive collections 7. Taxpayer’s remedies a. Contesting an assessment of value of real property (1) Appeal to the Local Board of Assessment Appeals (2) Appeal to the Central Board of Assessment Appeal 1.  A Co., a Philippine corporation. Is the owner of machinery, equipment and fixtures located at its plant in Muntinlupa City. The City Assessor characterized all these properties as real properties subject to the real property tax. A Co. appealed the matter to the Muntinlupa Board of Assessment  Appeals. The Board ruled in favor of the City. In accordance with RA 1125 (An Act creating the Court of Tax Appeals). A Co. brought a petition for review before the CTA to appeal the decision of the City Board of Assessment Appeals. Is the Petition of Review proper? Explain. (5%) SUGGESTED ANSWER: No. The CTA is devoid of jurisdiction to entertain appeals from the decision of the City Board of Assessment Appeals. Said decision is instead appealable to the Central Board of Assessment Appeals, which under the Local Government Code, has appellate jurisdiction over decisions of Local Board of Assessment Appeals. (Caltex Phils. Inc. v. Central Board of Assessment Appeals, L- 50466. May 31, 1982) (BAR 1999) (3) Effect of payment of tax b.Payment of real property tax under protest 1. On February 13, 1969, X obtained a loan of P800.000.00 from the GSIS secured by the mortgage of a parcel of land including its improvements. X failed to pay the loan. The lot was foreclosed and sold at public auction to the GSIS as the highest bidder. X failed to redeem the lot and the GSIS consolidated its title to the lot in 1977. In 1979, however, the GSIS allowed X to repurchase the lot.  After assessment by the City Assessor, the City Treasurer of Manila required X to pay the real estate taxes due on the lot for the years 1977 and 1978. X paid under protest. On September 5, 1979, X sent a demand letter to the City Treasurer for refund. The demand was refused. X then filed with the Regional Trial Court a complaint against the City of Manila for a “sum of money and/or recovery of real estate taxes paid under protest." The City questioned the jurisdiction of the Court. Decide.  ANSWER: Section 62 of the Real Property Tax Code provides that: "Sec. 62.Payment under protest. — a)

When a taxpayer desires for any reason to pay his tax under protest, he shall indicate the amount or portion thereof he is contesting and such protest shall be annotated on the tax receipts by writing thereon the words ‘paid under protest.' Verbal protests   shall be confirmed in writing, with a statement of the ground, therefor, within thirty days. The tax may be paid under protest, and in such case it shall be the duty of the Provincial, City or Municipal Treasurers to annotate the ground or grounds therefor on the receipt.

b)

In case of payments under protest, the amount or portion of the tax contested shall be held in trust by the treasurer and the difference shall be treated as revenue.

c)

In the event that the protest is finally decided in favor o f the government the amount or portion of the tax held in trust by the treasurer shall accrue to the revenue account, but if the protest shall be Page | 216

decided finally in favor of the protestant. the amount or portion of the tax protested or applied as tax credit to any other existing or future tax liability of the said protestant." (Emphasis Supplied)

If the owner is not satisfied with the action of the provincial or city assessors in the assessment of his property, he may file an appeal to the Board of Assessment Appeals of the province on city, within sixty (60) days from the receipt of the decision (Section 30 of the Real Property Tax Code). If the owner is not satisfied with the decision of the Board of Assessment Appeals, he may appeal the said decision to the Central Board of Assessment Appeals within thirty (30) days after the receipt of the decision (Sections 34 and 36 of the Real Property Tax Code). As enunciated in the case of Victorias Milling Co., Inc., vs. Court of Tax Appeals 22 SCRA 1008, 1001 (1968): "It Is settled in our Jurisdiction that where an assessment is illegal and void, the remedy of a taxpayer, who has already paid the realty tax under protest, is to sue for refund in the competent court of first instance. On the other hand, where the assessment is merely erroneous, his recourse is to file an appeal in the Provincial Board of Assessment Appeals within 60 days from receipt of the assessment." In view of the foregoing, the legal recourse of X is to appeal the decision of the City Treasurer to the Board of Assessment appeal, and not to file an action for sum of money and/or recovery of real estate taxes. Hence, the Regional Trial Court has jurisdiction over the complaint filed by X.  ALTERNATIVE ANSWERS: a) The Regional Trial Court has Jurisdiction. It has been held that the regular courts have jurisdiction over actions for refund of real estate taxes paid under protest on the ground of solution indebiti b)

The RTC does not have jurisdiction over the matter. Section 30 of PD. No. 464 (The Real Property Tax Code) prescribes the proper remedy of the taxpayer. It requires X, who is not satisfied with the action of the city assessor, to appeal his case to the Local Board of Assessment Appeal within sixty days from date or receipt by X of the written notice denying his request for refund of real property taxes paid. (BAR 1993) (1) (2) (3) (4) (5)

File protest with local treasurer Appeal to the Local Board of Assessment Appeals Appeal to the Central Board of Assessment Appeals Appeal to the CTA Appeal to the Supreme Court

IV. Tariff and Customs Code of 1978, as amended

A. Tariff and duties, defined B. General rule: all imported articles are subject to duty. 1. Importation by the government taxable C. Purpose for imposition D. Flexible tariff clause

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1. What do you understand by the term “flexible tariff clause" as used in the Tariff and Customs Code? (5%) SUGGESTED ANSWER: The term "flexible tariff clause "refers to the authority given to the President to adjust tariff rates under Section 401 of the Tariff and Customs Code, which is the enabling law that made effective the delegation of the taxing power to the President under the Constitution. Note: It is suggested that if the examinee cites the entire provision of Sec. 401 of the Tariff Customs Code, he should also be given full credit. (BAR 2001) 2. In view of the unfavorable balance of payment condition and the increasing budget deficit, the President of the Philippines. upon recommendation of the National Economic and Development  Authority, issues during a recess of Congress an Executive Order imposing an additional duty on all imports at the rate of ten (10%) percent ad valorem. The Executive Order also provides that the same shall take effect immediately. Ricardo San Miguel, an importer, questions the legality of the Executive Order on the grounds that only Congress has the authority to fix the rates of import duties and, in any event, such an Executive Order can take effect only thirty (30) days after promulgation and the President has no authority to shorten said period.  Are the objections of Mr. San Miguel tenable?  ANSWER: No. the objections are not tenable as the Executive Order cannot tak e effect “immediately". Being an “external” law and having the effect of law, the Executive Order cannot become effective without publication, a requirement of due process (Tanada vs. Tuvera, 136 SCRA27; Executive Order No. 202).  ALTERNATIVE ANSWER: Under the Flexible Tariff Clause (Sec. 401, Tariff and Customs Code), any order issued by the President thereunder can generally take effect only thirty (30) days after its issuance. In cases however of an order imposing additional import duties, the law provides that the same can take effect immediately. (BAR 1991) E. Requirements of importation 1. Beginning and ending of importation 1. When does importation begin and when does it end?  ANSWER: Importation begins from the time the carrying vessel or aircraft enters Philippine territorial jurisdiction 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 (Viduya vs. Berdiago, 73 SCRA 553). (BAR 1995) 2.

Obligations of importer a. Cargo manifest b.Import entry c. Declaration of correct weight or value d.Liability for payment of duties e. Liquidation of duties f. Keeping of records Page | 218

F. Importation in violation of tax credit certificate 1. Smuggling 2. Other fraudulent practices G. Classification of goods 1. Taxable importation 1. JKL Corporation is a domestic corporation engaged in the importation importation and sale of motor vehicles in the Philippines and is duly registered with the Subic Bay Metropolitan Authority (SBMA). In December 2007, it imported several second-hand motor vehicles from Japan and Korea, which it stores in a warehouse in Subic Bay. It sold these motor vehicles in April 2008, to persons residing in the customs territory. te rritory.  A) Are the importations of motor vehicles from abroad subject to customs duties and value added taxes? Explain. (4%) SUGGESTED ANSWER: a) No. The importation importation from abroad to the Subic Bay Freeport Freeport Zone is exempt exempt from customs duties and value-added taxes. The Freeport Zone is an extension of a foreign territory so that the vehicles imported while still within its secured perimeter is not subject to Philippine taxes. (RMC No. 50-2007; Seagate Technology Inc., v. Commissioner, 451 SCRA 132 [2005]). b) If they are taxable, upon upon sale to custom territory, territory, when must the duties duties and taxes be paid? What are the bases for and purposes of computing customs duties and VAT? To whom must the duties and VAT be paid? Explain. (3%) SUGGESTED ANSWER: b) When these motor vehicles vehicles are sold to the customs territory, territory, the duties and and taxes must be paid before they are physically brought out of the Freeport Zone. The introduction of the motor vehicles to the customs territory is considered as technical importation subject to the customs duties and VAT. The tax base for the customs duties is the transaction value while for VAT purposes, the tax base is the value used in computing customs duties plus customs duties, excise taxes and other charges incident to importation. (Section 107 (A), NIRC). These taxes on importation must be paid to the Bureau of Customs before the Authority to Release Imported Goods will be issued by the BIR. (Revenue Regulations No. 16-2005). (BAR 2008) 2. Dagat-dagatan Shipping Corp. (DSC) brought into the country two (2) non-propelled foreign barges which DSC chartered for use in the Philippine coastwise trade under a Temporary Certificate of Philippine Registration, to be returned to the foreign owner upon termination of the charter period but not beyond 1999, pursuant to P.D. No. 760, as amended. Upon their arrival, the barges were subjected to duty by the Bureau of Customs. DSC refused to pay any customs duty contending that the charter or lease of the barges, which will be returned to the foreign owner when the charter expires, is not n ot an importation and, therefore cannot be subjected to any customs duty. Is DSC's refusal with or without legal basis?  ANSW  ANSWER ER:: DSC’s refusal is without legal basis. The term imposi tion includes the entry into the country of any article from a foreign country. The fact that imported goods are to be re-exported does not mean that the customs duties may not be imposed, although, in certain cases and subject to limitations prescribed by the Tariff and Customs Code a drawback may be available to the taxpayer so as to be able to obtain their refund. An example of which are articles which are used in the manufacture of products for export within three (3) years after the importation. Page | 219

On what is the dutiable value of any imported article based?  ANSWER: The dutiable value of imported articles is the home consumption cost value, i.e., the cost or fair market value or price of the imported articles In wholesale quantities in the principal market of the exporting country or country of origin, including expenses collected from importation such as insurance, freight, packaging, loading and unloading charges but excluding internal excise taxes. In case such value is unascertainable, the Commissioner may also determine the home consumption value from any reliable and available data (Sec. 20l.TCC, as amended: Commissioner vs. Court of Tax Appeals, G.R No. 72069,21 May 1988). (BAR 1991) 2. 3.

Prohibited importation Conditionally-free importation

1. Jacob, after serving a 5-year tour of duty as military attache in Jakarta, returned to the Philippines bringing with him his personal effects including a personal computer and a car. Would Jacob be liable for taxes on these items? Discuss fully. (5%) SUGGESTED ANSWER: No. Jacob will be exempted provided he complies with the requirements under Sec. 105 of the Tariff and Customs Code.  ANOTHER SUGGESTED ANSWER: No. Jacob is entitled to the tax and duty-free importation of his personal effects, personal computer and car provided the following requirements are met: a) The car must have been ordered or purchased prior to the receipt by the Philippine mission or consulate in Jakarta of Jacob's recall order; b) The car is registered in Jacob's name; c) The exemption shall apply to the value of the car; d) The exemption shall apply to the aggregate value of his personal and household effects (including the personal computer) not exceeding thirty percentum (30%) of the total amount received by Jacob as salary and allowances during his assignment in Jakarta, but not to exceed four (4) years; e) Jacob must not have availed of the exemption more oftener than once every four years, (last par.. Sec. 105, Tariff and Customs Code) (BAR 2005) 2. X and his wife, Y, Filipinos living in the Philippines, went on a three-month pleasure trip around the world during the months of June, July and August 2002. 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 quantities. Are they “returning residents” for purposes of Section 105 of the Tariff and Customs Code? Explain. SUGGESTED ANSWER: No. The term “returning residents” refers to n ationals who have stayed in a foreign country fora period of at least six (6) months. (Section 105(f) of the Tariff and Customs Code). Due to their limited duration of stay abroad X and Y are not considered as “returning residents” but they are merely cons idered as travelers or tourists who enjoy the benefit of conditionally free importation. Note: Credit must likewise be given if the candidate answered in the affirmative, considering that travelers or tourists are given the same tax treatment as that of returning residents, treating treating their personal effects, not in commercial quantities, as conditionally free importation. (BAR 2003) Page | 220

H. Classification of duties 1. Ordinary/regular duties a. Ad valorem; methods of valuation (1) Transaction value 1. State and explain the basis of dutiable value of an imported article subject to an ad valorem tax under the Tariff and Customs Code. SUGGESTED ANSWER: The basis of dutiable value of an imported article subject to an ad valorem tax under the Tariff and Customs Code is its transaction value. (Sec. 201 (A), Tariff and Customs Code, as amended by R.A. No. 9135). If such value could not be determined, then the following values are to be utilized in their sequence: Transaction value of identical goods (Secs. 201 (B), Ibid; Sec. II. C.l, C.A.O. No. 4-2004); Transaction value of similar goods (Sec. 201 (C), Ibid.; Sec. II, D. 1, C.A.O. No. 4-2004); Deductive .value (Sec. II, E. 1, C.A.O. No. 4-2004); Computed value (Sec. n, F.l, C.A.O. No. 1-20040) and Fallback value (Sec. 201 (F), Ibid.)  ANOTHER SUGGESTED ANSWER: The basis of dutiable value of an imported article subject to an ad valorem tax under the Tariff and Customs Code is its transaction value which shall be the price actually paid or payable for the goods when sold for export to the Philippines, adjusted 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 (Sec. 201(A), Tariff and Customs Code, as amended by R.A. No. 9135) If such value could not be determined, then the following values are to be utilized in their sequence: Transaction value of identical goods (Sec. 201 (B) ibid; Sec. n, C. 1, C.A.O. No. 4-2004); Transaction value of similar goods (Sec. 201 (C), Ibid,; Sec. n, D.l, C.A.O. No. 4-2004); Deductive value (Sec. 11, E.l, C.A.O. No. 4-2004); Computed value (Sec. II, F.l, C.A.O. No. 1-20040) and Fallback value (Sec. 201 (F) ibid.) (BAR 2005) (2) Transaction value of identical goods (3) Transaction value of similar goods (4) Deductive value (5) Computed value (6) Fallback value b.Specific b. Specific 2. Special duties 1. Explain briefly each of the special customs duties authorized under the Tariff and Customs Code.  ANSWER: The following are the special s pecial duties imposed under the Tariff and Customs Code: (a) Dumping Duty - This is a duty levied on imported goods where it appears that a specific kind or class of foreign article is being imported into or sold or is likely to be sold in the Philippines at a price less than its fair value: (b) Countervailing Duty - This is a duty equal 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 Philippines of any article likely to injure an industry in the Philippines or retard or considerable retard the establishment of such industry: Page | 221

(c) Marking Duty - This is a duty on an ad valorem basis imposed for improperly marked articles. The law requires that foreign Importations must be marked in any official language of the Philippines the name of the country of origin of the article: (d) Discriminatory or Retaliatory Retaliatory Duty - This 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 Philippines in such a manner as to place the commerce of the Philippines at a disadvantage compared with the commerce of any foreign country. (BAR 1997) 2. Under the Tariff and Customs Code, what are a) dumping duties b) countervailing duties c) marking duties d) discriminatory discriminatory duties?  ANSWER: a) Dumping duties are special duties imposed by the Secretary of Finance upon recommendation of the Tariff Commission when it is found that the price of the imported articles is deliberately or continually fixed at less than the fair market value or cost of production, and the importation would cause or likely cause an injury to local industries engaged in the manufacture or production of the same or similar articles or prevent their establishment. b) Countervailing duties are special duties imposed by the Secretary of Finance upon prior investigation and report of the Tariff Commission to offset 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. c) Marking duties are special duties equivalent to 5% ad valorem imposed on articles not properly marked. These are collected by the Commissioner of Customs except when the improperly marked articles are exported or destroyed under customs supervision and prior to final liquidation of the corresponding entry. These duties are designed to prevent possible deception of the customers. d) Discriminatory duties are special duties collected in an amount not exceeding 1Q0% ad valorem, imposed by the President of the Philippines against goods of a foreign country which discriminates discriminates against Philippine commerce or against goods coming from the Philippines and shipped to a foreign country. (BAR 1995) a. Dumping duties 1. Distinguish countervailing duty from dumping duty. (5%) SUGGESTED ANSWER: Countervailing duty is a duty imposed in an amount equal 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 Philippines of any article likely to injure an industry in the Philippines or retard or considerably retard the establishment of such industry. (Section 302, Tariff and Customs Code). On the other hand. Dumping Duty is a duty levied on imported goods where it appears that a specific kind or class of foreign article is being imported into or sold or is likely to be sold in the Philippines at a price , less than its fair value. (Section 301, Tariff and Customs Code). (BAR 2005) b.Countervailing b. Countervailing duties 1. Distinguish countervailing duty from dumping duty. (5%) Page | 222

SUGGESTED ANSWER: Countervailing duty is a duty imposed in an amount equal 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 Philippines of any article likely to injure an industry in the Philippines or retard or considerably retard the establishment of such industry. (Section 302, Tariff and Customs Code). On the other hand. Dumping Duty is a duty d uty levied on imported goods where it appears that a specific kind or class of foreign article is being imported into or sold or is likely to be sold in the Philippines at a price , less than its fair value. (Section 301, Tariff and Customs Code). (BAR 2005) c. Marking duties d.Retaliatory/dis d. Retaliatory/discriminatory criminatory duties e. Safeguard

I.

Remedies

1. Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules that have been adopted on this score by – The Tariff and Customs Code; and SUGGESTED ANSWER: The rules that have been adopted on prescription are as follows: Tariff and Customs Code - It does not express any general statute of limitation; it provided, however, that "when articles have entered and passed free of duty or final adjustment of duties made, with subsequent delivery, such entry and passage free of duty or settlement of duties will, after the expiration of one (1) year, from the date of the final payment of duties, in the absence of fraud or protest, be final and conclusive upon all parties, unless the liquidation of import entry was merely tentative" (Sec 1603, TCC). (BAR 1997) 1.

Government a. Administrative/extrajudicial

1. The Tariff and Customs Code allows the Bureau of Customs to resort to the administrative remedy of seizure, such as by enforcing the tax lien on the imported article, and to the judicial remedy of filing an action in court. When does the Bureau of Customs normally n ormally avail itself – (a) of the administrative, instead of the judicial remedy, or (b) of the latter, instead of the former, remedy?  ANSWER: (a) The Bureau of Customs normally avails itself of the administrative remedy of seizure, such as by enforcing the tax lien on the imported articles. Instead of the judicial remedy when the goods to which the tax lien attaches, regardless of ownership, is still in the custody or control of the Government. In the case, however, of Importations which are prohibited or undeclared, the remedy of seizure and forfeiture may still be exercised by the Bureau of Customs 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 o f tax lien, the government can seek payment of the tax liability through judicial action since the tax liability of the importer constitutes a personal debt to the government, therefore, enforceable by action. In this case judicial remedy is normally availed of instead of the administrative remedy. (BAR 1997) Page | 223

(1) Search, seizure, forfeiture, arrest 1. Jessie brought into the Philippines a foreign-made luxury car, and paid less than the actual taxes and duties due. Due to the discrepancy, the Bureau of Customs instituted seizure proceedings and issued a warrant of seizure and detention. The car, then parked inside a pay parking garage, was seized and brought by government agents to a government impounding facility. The Collector of Customs denied Jessie’s request for the withdrawal  of the warrant.  Aggrieved, Jessie filed against the Collector a criminal complaint for usurpation of judicial functions on the ground that only a judge may issue a warrant of search and seizure. Resolve with reasons Jessie’s criminal complaint. (4%)

SUGGESTED ANSWER: The criminal complaint is bereft of merit. The issuance of a warrant of seizure and detention by the Collector of Customs for goods released contrary to law, as when there is underpayment of taxes and duties, is his primary and exclusive jurisdiction and precludes the judge of regular courts from taking cognizance of the subject matter. Accordingly, what was done by the Collector could not be a basis of a prosecution for the usurpation of judicial functions (Commissioner v. Navarro, 77 SCRA 264[1977]). Would your answer be the same if the luxury car was seized while parked inside the garage of Jessie’s residence? Why or why not? (4%) SUGGESTED ANSWER: No. The luxury car being in a dwelling house, cannot be seized by officers of the Bureau of Customs exercising police authority without a search warrant issued by a judge of a competent court (Section 2209, TCC; Pads v. Pamaran, 56 SCRA 16 [1974]). (BAR 2009) 2. William Antonio imported into the Philippines a luxury car worth US$100,000. This car was, however, declared only for US$20,000 and corresponding customs duties and taxes were paid thereon. Subsequently, the Collector of Customs discovered the underdeclaration and he initiated forfeiture proceedings of the imported car. a) May the Collector of Customs declare the imported car forfeited in favor of the government? Explain. (3%) SUGGESTED ANSWER: a) Yes. The Collector of Customs may declare forfeiture on imported goods which are undervalued or entered and valued through fraudulent means or device to the prejudice of the Government. Since the undervaluation is more than 30% of the actual value of the vehicle, it gives rise to a prima facie evidence of fraud which subjects the vehicle to forfeiture. (Section 2530, TCC). b) Are forfeiture proceedings of goods illegally imported criminal in nature? Explain. (3%) SUGGESTED ANSWER: b) No. An action for forfeiture is an action in rem, or an action directed against the imported goods themselves independently of any criminal action, which is in the nature of an action in personam, that may result as a consequence of a violation of an existing law. (C.F. Sharp and Co. Inc., v. Commissioner of Customs, 22 SCRA 760 [1968]). (BAR 2008) 3. On January 1, 1996, armed with warrants of seizure and detention issued by the Bureau of Customs, members of the customs enforcement and security services coordinated with the Quezon City police to search the premises owned by a certain Mr. Ho along Kalayaan Avenue, Quezon City, which allegedly contained untaxed vehicles and parts. While inside the premises, the member of Page | 224

the customs enforcement and security services noted articles which were not included in the list contained in the warrant. Hence, on January 15, 1996, an amended warrant and seizure was issued. On January 25, 1996, the customs personnel started hauling the articles pursuant to the amended warrant. This prompted Mr. Ho to file a case for injunction and damages with a prayer for a restraining order before the Regional Trial Court of Quezon City against the Bureau of Customs on January 27, 1996. On the same date, the trial court issued a temporary restraining order.  A motion to dismiss was filed by the Bureau of Customs on the ground that the Regional Trial Court has no jurisdiction over the subject matter of the complaint claiming that it was the Bureau of Customs that has exclusive jurisdiction over it. Decide.  ANSWER: The motion to dismiss should be granted. Seizure and forfeiture proceedings are within the exclusive jurisdiction of the Collector of Customs to the exclusion of regular Courts. Regional Trial Courts are devoid of competence to pass upon the validity or regularity of seizure and forfeiture proceedings conducted by the Bureau of Customs and to enjoin or otherwise interfere with these proceedings (Republic vs. CFI of Manila [Branch XXII], G.R. No. 43747, September 2,1992; Jao vs. CA, G.R No. 104604, October 6, 1995). (BAR 1996) 4. In smuggling a shipment of garlic, the smugglers used an eight-wheeler truck which they hired for the purpose of taking out the shipment from the customs zone. Danny, the truck owner, did not have a certificate of public convenience to operate his trucking business. Danny did not know that the shipment of garlic was illegally imported. Can the Collector of Customs of the port seize and forfeit the truck as an instrument in the smuggling?  ANSWER: Yes, the Collector of Customs of the port can seize and forfeit the truck as an instrument in the smuggling activity, since the same was used unlawfully in the importation of smuggled articles. The mere carrying of such articles on board the truck (in commercial quantities) shall subject the truck to forfeiture, since it was not being used as a duly authorized common carrier, which was chartered or leased as such. (Sec. 2530 (a], TCC) Moreover, although forfeiture of the vehicle will not be effected if it is established that the owner thereof had no knowledge of or participation in the unlawful act, there arises a prima facie presumption or knowledge or participation if the owner is not in the business for which the conveyance is generally used. Thus, not having a certificate of public convenience to operate a trucking business, he is legally deemed not to have been engaged in the trucking business. (Sec. 2531, Tariff and Customs Code) (BAR 1994) 5. The Collector of Customs instituted seizure proceedings against a shipment of motor vehicles for having been misdeclared as second-hand vehicles. State the procedure for the review of the decision up to the Supreme Court of the Collector of Customs adverse to the importer.  ANSWER: The procedure in seizure cases may be summarized as follows: (a) The collector issues a warrant for the detention or forfeiture of the imported articles; (Sec. 2301. Tariff and Customs Code) (b) The Collector gives the importer a written notice of the seizure and fixes a hearing date to give the importer an opportunity to be heard: (Sec. 2303, TCC) Page | 225

(c) A formal hearing is conducted; (Sec. 2312. TCC) (d) The Collector renders a declaration of forfeiture; (Sec. 2312, TCC) (e) The importer aggrieved by the action of the Collector in any case of seizure may appeal to the Commissioner for his review within fifteen (15) days from written notice of the Collector’s decisio n; (Sec. 2313, TCC) (f) The importer aggrieved by the action or ruling of the Commissioner in any case of seizure may appeal to the Court of Tax Appeals; (Sec. 2402, TCC) (g) The importer adversely affected by the decision of the Court of Tax Appeals may appeal to the Court of Appeals within fifteen (15) days which may be extended for another fifteen (15) days or such period as the Court of Tax Appeals may decide. (BAR 1994) 6. M/V Floria, a vessel of Philippine registry, was hired to transport beans from Singapore to India. The vessel was allegedly hijacked at sea and found its way to Bataan. It is also alleged that said beans are now with the List Co. and fake documents were used to show that the beans were imported from Japan. The Collector of Customs seized the M/V Floria and its cargo. The owner of M/V Floria filed a complaint in the Regional Trial Court to obtain possession of the vessel and the beans. Does the RTC have jurisdiction over the case?  ANSWER: The RTC has no jurisdiction. The Collector of Customs sitting in seizure and forfeiture proceedings has exclusive jurisdiction to hear and determine all questions touching on the seizure and forfeiture of dutiable goods. The RTC has no jurisdiction to pass upon the validity or regularity of the seizure and forfeiture proceedings conducted by the Bureau of Customs. [Commissioner of Customs vs. Makasiar. 177 SCRA 27, 33-34 (1989) citing Pacis vs. Averin, 18 SCRA 9071966)] Neither has RTC review powers over actions concerning seizure and forfeiture proceedings conducted by the Collector of Customs which is reviewable by the Commissioner of Customs whose decision, in turn, is reviewable by the Court of Tax Appeals, (ibid)  ALTERNATIVE ANSWERS: a) No. The owner must have first appealed the decision of the Collector to the Commissioner of Customs, and if the decision was adverse, then to the Court of Tax Appeals, consistent with the principle of exhaustion of administrative remedies. b) No. The question of seizure and forfeiture is for the Collector of Customs to determine in the first

instance and then the Commissioner of Customs. This is a field where the doctrine of primary jurisdiction controls. The Collector of Customs when sitting in forfeiture proceedings, constitutes a tribunal upon which the law confers jurisdiction to hear and determine all questions touching the forfeiture and further disposition of the subject matter. The exclusive jurisdiction in seizure and forfeiture cases vested in the Collector of Customs precludes the RTC from assuming cognizance over such matter. The RTC is thus devoid of competence to act on the matter (Republic v. CF1 of Manila, 213 SCRA 222). (BAR 1993) 7.  A disgruntled employee of Apache Corporation reported to the Commissioner of Customs that the company is illegally importing electronic equipment by way of unlawful "shipside" activities thereby evading payment of customs duties and taxes on the goods.  Accordingly, the Commissioner of Customs, upon the request of the Economic Intelligence and Investigation Bureau (EIIB), issued warrants of seizure and detention and directed EIIB to seize Page | 226

the goods listed in the warrants.  After the seizure of the goods and considering the magnitude of the value of the goods, counsel for  Apache Corporation filed a petition with the Supreme Court for certiorari, prohibition and mandamus to enjoin the Commissioner of Customs and his agents from continuing further with the forfeiture proceedings and praying that the Commissioner return the confiscated articles on the ground that the warrants were in violation of the Rules of Court and the Bill of Rights. If you are a newly-appointed Solicitor in the office of the Solicitor General representing the Commissioner of Customs, how would you defend the latter? Give the specific defenses.  ANSWER: Appurtenant to its power under the Tariff and Customs Code to enforce the provisions of such law, the Bureau of Customs may conduct searches and seizures even without the benefit of a warrant issued by a judge upon probable cause. This is historically considered an exemption from the constitutional guarantee against unreasonable searches and seizures.  Assuming that the enforcement of the warrant had been extended to the residence of the President of Apache Corporation, is such enforcement valid? Explain.  ANSWER: No. The Tariff and Customs Code authorizes custom officials and agents to search any building, except dwelling houses. Do you think the petition for certiorari, prohibition and mandamus filed by Apache Corporation will prosper in the Supreme Court? Discuss.  ANSWER: No. The choice of remedy assumes want of authority and Jurisdiction. Warrantless searches and seizures are, however, authorized under TCC. Such searches and seizures are not considered unreasonable within the meaning of the constitutional guarantee. (BAR 1992) 8. Sometime in 15 September 1990, a shipment of 150 packages of imported goods and personal effects arrived and was unloaded at the Port of Manila. After the amount of P15,887.00 was paid by the consignee as customs duties, internal revenue taxes, fees and other charges, the packages were released from the Customs house. As the packages were being transported from the Customs area to their destination, the truck carrying them was intercepted at T.M, Kalaw St., Ermita, Manila by agents of the Economic Intelligence & Investigation Bureau (EIIB). In a formal communication. EIIB informed the Collector of Customs that the packages were released from the customs zone without proper appraisal to the damage of the Government and requested for the issuance of the necessary warrant of seizure. A seizure proceeding (S.I. No. 796) was then instituted and the Collector of Customs issued a warrant of seizure and detention. During the progress of the search and seizure, and while the goods were being removed by the Customs agents from the bodegas where they were stored, the consignee filed a Petition (Civil Case No. 234) with the Regional Trial Court of Manila asking that the Collector of Customs and all his agents be restrained from further enforcing the aforesaid warrant and from proceeding with the trial of S.I. 796, and that said warrant be declared null and void since the Collector no longer had jurisdiction to issue the same considering that the customs duties and taxes had already been paid and the goods had left the control and jurisdiction of the Bureau of Customs Did the Collector of Customs have Jurisdiction to issue the warrant of seizure and detention?  ANSWER: On the assumption that the goods* were released from Customs custody without proper appraisal as Page | 227

contended by EIIB, the Collector of Customs had Jurisdiction to issue the warrant of seizure and detention. This remedy is generally available in importations tainted with irregularity (Sec. 2531, TCC: Viduya vs. Berdiago. 73 SCRA 553). Did the payment of the customs duties, taxes, etc. render illegal and improper the issuance of said warrant?  ANSWER: In seizure and forfeiture, the payment of customs duties, taxes, etc., does not necessarily render as irregular and improper the issuance of a warrant of seizure and detention. What is legally consequential is whether there was, in fact, an irregularity committed in the importation of the articles and their release from customs. Has the Regional Trial Court jurisdiction to hear and decide Civil Case No. 234?  ANSWER: No. the RTC has no jurisdiction. In the case of seizures and forfeitures, an ordinary court may not take cognizance of the case and. therefore, said courts would be bereft of jurisdiction to hear and decide the same. The jurisdiction of the Collector of Customs in seizure and forfeiture proceedings is exclusive of all other courts. The proper remedy would be to go through with the hearing of the case with the Collector of Customs from whose decision an appeal may be made to the Commissioner of Customs and. thereafter, if the taxpayer still feels aggrieved, to the Court of Tax Appeals (BAR 1991) 9. What is the rule on appeal from decisions of the Collector of Customs in protest and seizure cases? When is the decision of the Collector of Customs appealable to the Court of Tax Appeals? Explain. (5%) SUGGESTED ANSWER: Decisions of the Collector of Customs in protest and seizure cases are appealable to the Commissioner of Customs within 15 days from receipt of notice of the written decision. As a rule, decisions of the Collector of Customs are not appealable to the Court of Tax Appeals. If the Collector of Customs, however, does not decide a protest for a long period of time, the inaction may be considered as an adverse decision by the Collector of Customs and the aggrieved taxpayer may appeal to the CTA even without the Collector’s and Commissioner’s actual decision (Commissioner of Customs v. Planters Products, Inc. G.R. No. 82018, March 16, 1989). b.Judicial 1. The Tariff and Customs Code allows the Bureau of Customs to resort to the administrative remedy of seizure, such as by enforcing the tax lien on the imported article, and to the judicial remedy of filing an action in court. When does the Bureau of Customs normally avail itself – (c) of the administrative, instead of the judicial remedy, or (d) of the latter, instead of the former, remedy?  ANSWER: (c) The Bureau of Customs normally avails itself of the administrative remedy of seizure, such as by enforcing the tax lien on the imported articles. Instead of the judicial remedy when the goods to which the tax lien attaches, regardless of ownership, is still in the custody or control of the Government. In the case, however, of Importations which are prohibited or undeclared, the remedy of seizure and forfeiture may still be exercised by the Bureau of Customs even if the goods are no longer in its custody. Page | 228

(d) On the other hand, when the goods are properly released and thus beyond the reach o f tax lien, the government can seek payment of the tax liability through judicial action since the tax liability of the importer constitutes a personal debt to the government, therefore, enforceable by action. In this case judicial remedy is normally availed of instead of the administrative remedy. (BAR 1997) (1) Rules on appeal including jurisdiction 2. Taxpayer 1. Compare the taxpayer’s remedies under the National Internal Revenue Code and the Tariff and Customs Code.  ANSWER: The taxpayer's remedies under the National Internal Revenue Code may be categorized into remedies before payment and remedies after payment. The remedy before payment consists of administrative remedy which is the filing of protest within 30 days from receipt of assessment, and judicial remedy which is the appeal of the adverse decision of the Commissioner on the protest with the Court of Tax Appeals, thereafter to the Court of Appeals and finally with the Supreme Court. The remedy after payment is availed of by paying the assessed tax within 30 days from receipt of assessment and the filing 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. If there is a denial of the claim, appeal to the CTA shall be made within thirty days from denial but within two years from date of payment. If the Commissioner 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 Commissioner as a denial and elevate the case to the CTA before the expiration of the two- year period. Under the Tariff and Customs Code, taxpayer’s remedies arise only   after payment of duties. The administrative remedies consist of filing a claim for refund which may take the form of abatement or drawback. The taxpayer can also file a protest within 15 days from payment if he disagrees with the ruling or decision of the Collector of Customs regarding the legality or correctness of the assessment of customs duties. If the decision of the Collector is adverse to the taxpayer, he can notify the Collector within 15 days from receipt of said decision of his desire to have his case reviewed by the Commissioner. The decision of the Collector on the taxpayer’s protest, if adverse to the Government, is automatically elevated to the Commissioner for review; and if such decision is affirmed by the Commissioner, the same shall be automatically elevated to and finally reviewed by the Secretary of Finance.

Resort to judicial relief can be had by the taxpayer by appealing the decision of the Commissioner or of the Secretary of Finance (for cases subject to automatic review) within 30 days from the promulgation of the adverse decision to the CTA. (BAR 1996) 2. Discuss briefly the remedies of an importer during the pendency of seizure proceedings.  ANSWER: During the pendency of seizure 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 Collector, conditioned for the payment of the appraised value of the article and/or any fine, expenses and costs which may be adjudged in the case; provided, that articles the importation of which is prohibited by law shall not be released under bond. The importer may also offer to pay to the collector a fine imposed by him upon the property to secure its release or in case of forfeiture, the importer shall offer to pay for the domestic market value of the seized article, which offer subject to the approval of the Commissioner maybe accepted by the Collector in settlement of the seizure case, except when there is fraud. Upon payment of the fine or domestic market value, the property shall be forthwith released and all liabilities which may or might attach to the property Page | 229

by virtue of the offense which was the occasion of the seizure 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. (BAR 1996) a. Protest 1. The Collector of Customs issued an assessment for unpaid customs duties and taxes on the importation of your client in the amount of P980.000.00. Where will you file your case to protect your client’s right? Choose the correct courts/ agencies, observing their proper hierarchy. 5% 1. 2. 3. 4. 5. 6. 7.

Court of Tax Appeals Collector of Customs Commissioner of Customs Regional Trial Court Metropolitan Trial Court Court of Appeals Supreme Court

SUGGESTED ANSWER: I will file a protest with the Collector of Customs (Sec. 230S, TCC). Should the Collector promulgate a decision adverse to my client, I will give a written notice to the Collector, copy furnished the Commissioner of Customs, of my client’s desire to have the matter reviewed by the Commissioner (Sec. 2313, TCC). If the Commissioner affirms the decision of the Collector I will file an appeal with the Court of Tax Appeals within 30 days from receipt of the decision (1997 Rules of Civil Procedure, RA 9282). If the Court of Tax Appeals issues a decision adverse to my client, I will file with the Supreme Court a verified petition for review on certiorari pursuant to Rule 45 (RA 9282).  ANOTHER SUGGESTED ANSWER: I will file my case as follows: 1. Protest with the Collector of Customs (Sec. 2308, TCC); 2. Review by the Commissioner of Customs (Sec. 2313, TCC); 3. Appeal to the Court of Tax Appeals (RJL 9282); and 4. Petition for Review on Certiorari with the Supreme Court (RJL 9282). (BAR 2006) 2. What is the basis of the automatic review procedure in the Bureau of Customs? Explain your answer. (5%) SUGGESTED ANSWER: Automatic review is intended to protect the interest of the Government in the collection of taxes and customs duties in seizure and protest cases. Without such automatic review, neither the Commissioner of Customs nor the Secretary of Finance would know about the decision laid down by the Collector favoring the taxpayer. The power to decide seizure and protest cases may be abused if no checks are instituted. Automatic review is necessary because nobody is expected to appeal the decision of the Collector which is favorable to the taxpayer and adverse to the Government. This is the reason why whenever the decision of the Collector is adverse to the Government, the said decision is automatically elevated to the Commissioner for review; and if such decision is affirmed by the Commissioner, the same shall be automatically elevated to and be finally reviewed by the Secretary of Finance (Yaokasin v. Commissioner of Customs, 180 SCRA 591 [1989]). (BAR 2002) b.Abandonment c. Abatement and refund

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V.

Judicial Remedies (R.A. No. 1125, as amended, and the Revised Rules of the Court of Tax Appeals) 1.

Jurisdiction of the Court of Tax Appeals a. Exclusive appellate jurisdiction over civil tax cases

1. Mr. Abraham Eugenio, a pawnshop operator, after having been required by the Revenue District Officer to pay value-added tax pursuant to a Revenue Memorandum Order (RMO) of the Commissioner of Internal Revenue, filed with the Regional Trial Court an action questioning the validity of the RMO. If you were the judge, will you dismiss the case? 5% SUGGESTED ANSWER: Yes. A RMO is in reality a ruling or an opinion issued by the Commissioner in implementing the provisions of the Tax Code dealing with the taxability of pawnshops. The power to review rulings issued by the Commissioner is lodged with the Court of Tax Appeals (CTA) and not with the Regional Trial Court. A ruling f alls within the purview of “other matters arising under the Tax Code, ’’ appealable only to the CTA (CIR v. Leal, 392 SCRA 9 [2002]). (BAR 2006) 2. In the investigation of the withholding tax returns of AZ Medina Security Agency (AZ Medina) for the taxable years 1997 and 1998, a discrepancy between the taxes withheld from its employees and the amounts actually remitted to the government was found. Accordingly, before the period of prescription commenced to run, the BIR issued an assessment and a demand letter calling for the immediate payment of the deficiency withholding taxes in the total amount of P250,000.00. Counsel for AZ Medina protested the assessment for being null and void on the ground that no preassessment notice had been issued. However, the protest was denied. Counsel then filed a petition for prohibition with the Court of Tax Appeals to restrain the collection of the tax. Will the special civil action for prohibition brought before the CTA under Sec. 11 of RA No. 1125 prosper? Discuss your answer. (3%) SUGGESTED ANSWER: The special civil action for prohibition will not prosper, because the CTA has no jurisdiction to entertain the same. The power to issue writ of injunction provided for under Section 11 of RA 1125 is only ancillary to its appellate jurisdiction. The CTA is not vested with original jurisdiction to issue writs of prohibition or injunction independently of and apart from an appealed case. The remedy is to appeal the decision of the BIR. (Collector v. Yuseco, 3 SCRA 313 [1981]). (BAR 2002) 3. Does the Court of Appeals have the power to review compromise agreements forged by the Commissioner of Internal Revenue and a taxpayer? Explain. (5%) SUGGESTED ANSWER: No, for either of two reasons (1) In instances in which the Commissioner of Internal Revenue is vested with authority to compromise, such authority should be exercised in accordance with the Commissioner's discretion, and courts have no power, as a general rule, to compel him to exercise such discretion one way or another. (Koppel Phils., Inc. v. CIR, 87 Phil. 351 [1950ft, (2) If the Commissioner abuses his discretion by not following the parameters set by law, the CTA, not the Court of Appeals, may correct such abuse if the matter is appealed to it. In case of arbitrary or capricious exercise by the Commissioner of the power to compromise, the compromise can be attacked and reversed though the judicial process. It must be noted however, that a compromise is considered as other matters arising under the NIRC which vests the CTA with jurisdiction, and since the decision of the CTA is appealable to the Supreme Court, the Court of Appeals is devoid of any power of review a compromise settlement forged by the Commissioner (PNOCv. Savellano, G.R. No. 109976, April 26, 2005; RA No. 9282 on jurisdiction of the CTA). Page | 231

4. The Collector of Customs of the Port of Cebu issued warrants of seizure and detention against the importation of machineries and equipment by LLD Import and Export Co. (LLD) for alleged nonpayment of tax and customs duties in violation of customs laws. LLD was notified of the seizure, but, before it could be heard, the Collector of Customs issued a notice of sale of the articles. In order to restrain the Collector from carrying out the order to sell, LLD filed with the Court of Tax  Appeals a petition for review with application for the issuance of a writ of prohibition. It also filed with the CTA an appeal for refund of overpaid taxes on its other importations of raw materials which has been pending with the Collector of Customs. The Bureau of Customs moved to dismiss the case for lack of jurisdiction of the Court of Tax Appeals.  A. Does the Court of Tax Appeals have jurisdiction over the petition for review and writ of prohibition? Explain (3%) B. Will an appeal to the CTA for tax refund be possible? Explain (2%) SUGGESTED ANSWER: A. No, because there is no decision as yet by the Commissioner of Customs which can be appealed to the CTA. Neither the remedy of prohibition would lie because the CTA has not acquired any appellate jurisdiction over the seizure case. The writ of prohibition being merely ancillary to the appellate jurisdiction, the CTA has no jurisdiction over it until it has acquired jurisdiction on the petition for review. Since there is no appealable decision, the CTA has no jurisdiction over the petition for review and writ of prohibition. (Commissioner of Customs v. Alikpala, 36 SCRA 208 [1970]). B.

No, because the Commissioner of Customs has not yet rendered a decision on the claim for refund. The jurisdiction of the Commissioner and the CTA are not concurrent in so far as claims for refund are concerned. The only exception is when the Collector has not acted on the protested payment for a long time, the continued inaction of the Collector or Commissioner should not be allowed to prejudice the taxpayer. (Nestle Phils., Inc. v. Court of Appeals, GR No. 134114, July 6, 2001). (BAR 2002)

5. On June 16, 1997, the Bureau of Internal Revenue (BIR) issued against the Estate of Jose de la Cruz a notice of deficiency estate tax assessment, inclusive of surcharge, interest and compromise penalty. The Executor of the Estate of Jose de la Cruz (Executor) filed a timely protest against the assessment and requested for waiver of the surcharge, interest and penalty. The protest was denied by the Commissioner of Internal Revenue (Commissioner) with finality on September 13, 1997. Consequently, the Executor was made to pay the deficiency assessment on October 10, 1997. The following day, the Executor filed a Petition with the Court of Tax Appeals (CTA) praying for the refund of the surcharge, interest and compromise penalty. The CTA took cognizance of the case and ordered the Commissioner to make a refund. The Commissioner filed a Petition for Review with the Court of Appeals assailing the jurisdiction of the CTA and the Order to make refund to the Estate on the ground that no claim for refund was filed with the BIR. Is the stand of the Commissioner correct? Reason. (2%) SUGGESTED ANSWER: Yes. There was no claim for refund or credit that has been duly filed with the Commissioner of Internal Revenue which is required before a suit or proceeding can be filed in any court (Sec. 229, NIRC of 1997). The denial of the claim by the Commissioner is the one which will vest the Court of Tax Appeals jurisdiction over the refund case should the taxpayer decide to appeal on time. (BAR 2000) 6. On the basis of a warrant of seizure and detention issued by the Collector of Customs for the purpose of enforcing the Tariff and Customs Laws, assorted brands of cigarettes said to have been illegally imported into the Philippines were seized from a store where they were openly offered for sale. Dissatisfied with the decision rendered after hearing by the Collector of Customs on the Page | 232

confiscation of the articles, the importer filed a petition for review with the Court of Tax Appeals. The Collector moved to dismiss the petition for lack of jurisdiction. Rule on the motion. (2%) SUGGESTED ANSWER: Motion granted. The Court of Tax Appeals has Jurisdiction only over decisions of the Commissioner of Customs in cases involving seizures, detention or release of property affected. (Sec. 7, RA. No. 1125). There is no decision yet of the Commissioner which is subject to review by the Court of Tax Appeals. (BAR 2000)  ALTERNATIVE ANSWER: Motion granted. The Court of Tax Appeals has no jurisdiction because there is no decision rendered by the Commissioner of Customs on the seizure and forfeiture case. The taxpayer should have appealed the decision rendered by the Collector within fifteen (15) days from receipt of the decision to the Commissioner of Customs. The Commissioner is adverse decision would then be the subject of an appeal to the Court of Tax Appeals. Under the same facts, could the importer file an action in the Regional Trial Court for replevin on the ground that the articles are being wrongfully detained by the Collector of Customs since the importation was not illegal and therefore exempt from seizure? Explain. (3%) SUGGESTED ANSWER: No. The legislators intended to divest the Regional Trial Courts of the jurisdiction to replevin a property which is a subject of seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined by the simple device of replevin. (De Ia Fuente v. De Veyra, et aL, 120 SCRA 455) There should be no unnecessary hindrance on the government’s drive to prevent smuggling and o ther frauds upon the Customs. Furthermore, the Regional Trial Court do not have jurisdiction in order to render effective and efficient the collection of import and export duties due the State, which enables the government to carry out the functions it has been instituted to perform. (Jiao, et aL, Court of Appeals, et aL, and companion case, 249 SCRA 35, 43) (BAR 2000)

7.  A Co., a Philippine corporation, received an income tax deficiency assessment from the BIR on May 5, 1995. On May 31, 1995, A Co. filed its protest with the BIR. On July 30, 1995. A Co. submitted to the BIR all relevant supporting documents. The CIR did not formally rule on the protest but on January 25. 1996, A Co. was served a summons and a copy of the complaint for collection of the tax deficiency filed by the BIR with the Regional Trial Court (RTC). On February 20. 1996, A Co. brought a Petition for Review before the CTA. The BIR contended that the Petition is premature since there was no formal denial of the protest of A Co. and should therefore be dismissed. Has the CTA jurisdiction over the case? SUGGESTED ANSWER: Yes, the CTA has jurisdiction over the case because this qualifies as an appeal from the Commissioner's decision on disputed assessment. When the Commissioner decided to collect the tax assessed without first deciding on the taxpayer's protest, the effect of the Commissioner is action of filing a judicial action for collection is a decision of denial of the protest, in which event the taxpayer may file an appeal with the CTA. (Republic v. Lim Tian Teng &. Sons, Inc., 16 SCRA 584; Dayrit v. Cruz, L-39910, Sept. 26, 1988) (BAR 1999) 8.  A Co., a Philippine corporation, received an income tax deficiency assessment from the BIR on November 25, 1996. On December 10, 1996, A Co. filed its protest with the BIR On May 20. 1997, the BIR issued a warrant of distraint to enforce the assessment. ‘This warrant was served on A Co. on May 25,1997. In a letter dated June 4,1997 and received by A Co. 5 days later, the CIR formally denied A Co.’s protest stating that it constitutes his final decision on the matter. On July 6, 1997, A Page | 233

Co. filed a Petition for Review with the CTA The BIR moved to dismiss the Petition on the ground that the CTA has no jurisdiction over the case. Decide. (10%) SUGGESTED ANSWER: The CTA has jurisdiction over the case. The appealable decision is the one which categorically stated that the Commissioner's action on the disputed assessment is final and, therefore, the reckoning of the 30-day period to appeal was on June 9, 1999. The filing of the petition for review with the CTA was timely made. The Supreme Court has ruled that the CIR must categorically state that his action on a disputed assessment is final; other* wise, the period to appeal will not commence to run. That final action cannot be implied from the mere issuance of a warrant of distraint and levy. (CIR v. Union Shipping Corporation, 185 SCRA 547). (BAR 1999) 9.  A taxpayer received, on 15 January 1996, an assessment for an internal revenue tax deficiency. On 10 February 1996, the taxpayer forthwith filed a petition for review with the Court of Tax Appeals. Could the Tax Court entertain the petition? Under the above factual setting, the taxpayer, instead of questioning the assessment he received n 15 January 1996 paid, on 01 March 1996 the "deficiency tax" assessed. The taxpayer requested a refund from the Commissioner by submitting a written claim on 01 March 1997. It was denied. The taxpayer, on 15 March 1997, filed a petition for review with the Court of Appeals. Could the petition still be entertained?  ANSWER: No. Before taxpayer can avail of judicial remedy he must first exhaust administrative remedies by filing a protest within 30 days from receipt of the assessment. It is the Commissioner's decision on the protest that give the Tax Court jurisdiction over the case provided that the appeal is filed within 30 days from receipt of the Commissioner’s decision. An assessment by the BIR is not the Commissioner's decision from which a petition for review may be filed with the Court of Tax Appeals. Rather, it is the action taken by the Commissioner in response to the taxpayer's protest on the assessment that would constitute the appeallable decision (Section 7, RA 1125). No, the petition for review cannot be entertained by the Court of Appeals, since decisions of the Commissioner on cases involving claim for tax refunds are within the exclusive and primary jurisdiction of the Court of Tax Appeals (Section 7, RA 1125). (BAR 1997) 10. Under Section 2523 of the Tariff and Customs Code, the duty of verifying the correct weight of a cargo shipment is imposed upon the vessel’s master, owner or employee. If a discrepancy between the actual gross weight and declared gross weight of manifested cargo exceeds 20% and “the Collector shall be of the opinion that such discrepancy was due to the carelessness or incompetency of the master or pilot in command, owner or employee of the vessel, a fine of not more than 15% of the value of the article may be imposed upon the importing vessel.”  ABC Corporation’s vessel was found, after appropriate administrative proceedings, to have violated the said provision far exceeding the 20% statutory limitation. The Collector of Customs imposed a dine of P22.600.00 (representing 15% of the value of the discrepancy) which was affirmed by the Commissioner of Customs.

On appeal by ABC Corporation, the Court of Tax Appeals found the fine of P22.600.00 harsh and unreasonable for a first offense and reduced the same to P5.000.00. The Commissioner of Customs questions the scope of authority of the Court of Tax Appeals in the determination of the fine imposable under Section 2523 of the Tariff and Customs Code. Whose judgment should prevail under the circumstances of the case? Explain fully. Page | 234

 ANSWER: The judgment of the Court of Tax Appeals should prevail. The CTA has exclusive appellate jurisdiction over decisions of the Commissioner of Customs in cases involving the imposition of fines, forfeitures or other penalties. (BAR 1992) (1) Cases within the jurisdiction of the court en banc (2) Cases within the jurisdiction of the court in divisions b. Criminal cases (1) Exclusive original jurisdiction 1. In criminal cases where the Court of Tax Appeals (CTA) has exclusive original jurisdiction , the right to file a separate civil action for the recovery of taxes may be reserved. (1%) SUGGESTED ANSWER: FALSE. [Sec. 11, Rule 9, 2005 Rules of the Tax Appeals, as amended.] 2. The proceeding before the CTA in the exercise of its exclusive original jurisdiction are in the nature of trial de novo. (1%) SUGGESTED ANSWER: TRUE. [CIR v.Manila Mining Corp. GR No.153204, Aug 31, 2005] 3. Judgments, resolutions or orders of the Regional Trial Court in the Exercise of its original jurisdiction involving criminal offenses arising from violations of the NIRC are appealable to the CTA, which shall hear the cases en banc. (1%) SUGGESTED ANSWER: FALSE. [Sec. 3(b)(2), Rule 4, 2005 Revised Rules of the Court of Tax Appeals.] (2) Exclusive appellate jurisdiction in criminal cases 2.

Judicial procedures a. Judicial action for collection of taxes

1. Which court acts on: tax collection cases filed by the BIR?  ANSWER: Tax collection cases are filed by the BIR with regular courts. (BAR 1992) (1) Internal revenue taxes 1. On March 15, 2000, the BIR issued a deficiency income tax assessment for the taxable year 1997 against the Valera Group of Companies (Valera) in the amount of P10 million. Counsel for Valera protested the assessment and requested a reinvestigation of the case. During the investigation, it was shown that Valera had been transferring its properties to other persons. As no additional evidence to dispute the assessment had been presented, the BIR issued on June 16, 2000 warrants of distraint and levy on the properties and ordered the filing of an action in the Regional Trial Court for the collection of the tax. Counsel for Valera filed an injunctive suit in the Regional Trial Court to compel the BIR to hold the collection of the tax in abeyance until the decision on the protest was rendered. Page | 235

Can the BIR file the civil action for collection, pending decision on the administrative protest? Explain. (3%) SUGGESTED ANSWER: Yes, because there is no prohibition for this procedure considering that the filing of a civil action for collection during the pendency of an administrative protest constitutes the final decision of the Commissioner on the protest (CIR v. Union Shipping Corp., 85 SCRA 548 [1990]).  As counsel for Valera, what action would you take in order to protect the interest of your client? Explain your answer. (2%) SUGGESTED ANSWER: I will wait for the filing of the civil action for collection and consider the same as an appealable decision. I will not file an injunctive suit because it is not an available remedy. I would then appeal the case to the Court of Tax Appeals and move for the dismissal of the collection case with the RTC. Once the appeal to the CTA Is filed on time, the CTA has exclusive jurisdiction over the case. Hence, the collection case in the RTC should be dismissed (Yabes v. Flojo, 115 SCRA 278 [1982]). (BAR 2002) 2. Describe separately the procedures on the legal remedies under the Tax Code available to an aggrieved taxpayer both at the administrative and judicial levels. (5%) SUGGESTED ANSWER: The legal remedies of an aggrieved taxpayer under the Tax Code, both at the administrative and judicial levels, may be classified into those for assessment, collection and refund. The procedures for the administrative remedies for assessment are as follows: a. After receipt of the Pre-Assessment Notice, he must within fifteen (15) days from receipt explain why no additional taxes should be assessed against him. b. If the Commissioner of Internal Revenue Issues an assessment notice, the taxpayer must administratively protest or dispute the assessment by filing a motion for reconsideration or reinvestigation within thirty (30) days from receipt of the notice of assessment. (4th par., Sec. 228, NIRC of 1997) Within sixty (60) days from filing of the protest, the taxpayer shall submit all relevant supporting documents. The judicial remedies of an aggrieved taxpayer relative to an assessment notice are as follows: a. Where the Commissioner of Internal Revenue has not acted on the taxpayer’s protest within a period of one hundred eighty (180) days from submission of all relevant documents, then the taxpayer has a period of thirty (30) days from the lapse of said 180 days within which to interpose a petition for review with the Court of Tax Appeals. b. Should the Commissioner deny the taxpayer's protest, then he has a period of thirty (30) days from receipt of said denial within which to interpose a petition for review with the Court of Tax Appeals. In both cases the taxpayer must apply with the Court of Tax Appeals for the issuance of an injunctive writ to enjoin the Bureau of Internal Revenue from collecting the disputed tax during the pendency of the proceedings. The adverse decision of the Court of Tax Appeals is appealable to the Court of Appeals by means of a petition for certiorari within a period of fifteen (15) days from receipt of the adverse decision, extendible for another period of fifteen (15) days for compelling reasons, but the extension is not to exceed a total of thirty (30) days in all. Page | 236

The adverse decision of the Court of Appeals is appealable to the Supreme Court by means of a petition for review on certiorari within a period of fifteen (15) days from receipt of the adverse decision of the Court of Appeals. The employment by the Bureau of Internal Revenue of any of the administrative remedies for the collection of the tax like distraint, levy, etc. may be administratively appealed by the taxpayer to the Commissioner whose decision is appealable to the Court of Tax Appeals under other matter arising under the provisions of the National Internal Revenue Code. The judicial appeal starts with the Court of Tax Appeals, and continues in the same manner as shown above. Should the Bureau of Internal Revenue decide to utilize Its judicial tax remedies for c ollecting the taxes by means of an ordinary suit filed with the regular courts for the collection of a sum of money, the taxpayer could oppose the same going up the ladder of judicial processes from the Municipal Trial Court (as the case may be) to the Regional Trial Court, to the Court of Appeals, thence to the Supreme Court. The remedies of an aggrieved taxpayer on a claim for refund is to appeal the adverse decision of the Commissioner to the CTA in the same manner outlined above. (BAR 2000) 3. Compare the taxpayer’s remedies under the National Internal Revenue Code and the Tariff and Customs Code.  ANSWER: The taxpayer's remedies under the National Internal Revenue Code may be categorized into remedies before payment and remedies after payment. The remedy before payment consists of administrative remedy which is the filing of protest within 30 days from receipt of assessment, and judicial remedy which is the appeal of the adverse decision of the Commissioner on the protest with the Court of Tax Appeals, thereafter to the Court of Appeals and finally with the Supreme Court. The remedy after payment is availed of by paying the assessed tax within 30 days from receipt of assessment and the filing 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. If there is a denial of the claim, appeal to the CTA shall be made within thirty days from denial but within two years from date of payment. If the Commissioner 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 Commissioner as a denial and elevate the case to the CTA before the expiration of the two- year period. Under the Tariff and Customs Code, taxpayer’s remedies arise only after payment of duties. The administrative remedies consist of filing a claim for refund which may take the form of abatement or drawback. The taxpayer can also file a protest within 15 days from payment if he disagrees with the ruling or decision of the Collector of Customs regarding the legality or correctness of the assessment of customs duties. If the decision of the Collector i s adverse to the taxpayer, he can notify the Collector within 15 d ays from receipt of said decision of his desire to have his case reviewed by the Commissioner. The decision of the Collector on the taxpayer’s protest, if adverse to the Government, is autom atically elevated to the Commissioner for review; and if such decision is affirmed by the Commissioner, the same shall be automatically elevated to and finally reviewed by the Secretary of Finance.

Resort to judicial relief can be had by the taxpayer by appealing the decision of the Commissioner or of the Secretary of Finance (for cases subject to automatic review) within 30 days from the promulgation of the adverse decision to the CTA. (BAR 1996) (2) Local taxes (i) Prescriptive period Page | 237

1. On August 5, 1997, Adamson Co., Inc. (Adamson) filed a request for reconsideration of the deficiency withholding tax assessment on July 10, 1997, covering the taxable year 1994. After administrative hearings, the original assessment of P150,000.00 was reduced to P75,000.00 and a modified assessment was thereafter issued on August 05, 1999. Despite repeated demands,  Adamson failed and refused to pay the modified assessment. Consequently, the BIR brought an action for collection in the Regional Trial Court on September 15,2000. Adamson moved to dismiss the action on the ground that the government’s right to collect the tax by judicial action has prescribed. Decide the case. (5%) SUGGESTED ANSWER: The right of the Government to collect by judicial action has not prescribed. The filing of the request for reconsideration suspended the running of the prescriptive period and commenced to run again when a decision on the protest was made on August 5,1999. It must be noted that in all cases covered by an assessment, the period to collect shall be five (5) years from the date of the assessment but this period is suspended by the filing of a request for reconsideration which was acted upon by the Commissioner of internal Revenue (CIR v. Wyeth Suaco Laboratories, Inc., 202 SCRA 125 [1991]). (BAR 2002) 2. Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules that have been adopted on this score by – The Local Government Code Answer; SUGGESTED ANSWER: The rules that have been adopted on prescription are as follows: Local Government Code - Local taxes, fees, or charges shall be assessed within five (5) years 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 ten years from discovery of the fraud or intent to evade payment. They shall also be collected either by administrative or judicial action within five (5) years from date of assessment (Sec. 194, LGC). (BAR 1997) b.Civil cases (1) Who may appeal, mode of appeal, effect of appeal 1. The Collector of Customs of the Port of Cebu issued warrants of seizure and detention against the importation of machineries and equipment by LLD Import and Export Co. (LLD) for alleged nonpayment of tax and customs duties in violation of customs laws. LLD was notified of the seizure, but, before it could be heard, the Collector of Customs issued a notice of sale of the articles. In order to restrain the Collector from carrying out the order to sell, LLD filed with the Court of Tax  Appeals a petition for review with application for the issuance of a writ of prohibition. It also filed with the CTA an appeal for refund of overpaid taxes on its other importations of raw materials which has been pending with the Collector of Customs. The Bureau of Customs moved to dismiss the case for lack of jurisdiction of the Court of Tax Appeals.  A. Does the Court of Tax Appeals have jurisdiction over the petition for review and writ of prohibition? Explain (3%) B. Will an appeal to the CTA for tax refund be possible? Explain (2%) SUGGESTED ANSWER: A. No, because there is no decision as yet by the Commissioner of Customs which can be appealed to the CTA. Neither the remedy of prohibition would lie because the CTA has not acquired any appellate Page | 238

jurisdiction over the seizure case. The writ of prohibition being merely ancillary to the appellate jurisdiction, the CTA has no jurisdiction over it until it has acquired jurisdiction on the petition for review. Since there is no appealable decision, the CTA has no jurisdiction over the petition for review and writ of prohibition. (Commissioner of Customs v. Alikpala, 36 SCRA 208 [1970]). B.

No, because the Commissioner of Customs has not yet rendered a decision on the claim for refund. The jurisdiction of the Commissioner and the CTA are not concurrent in so far as claims for refund are concerned. The only exception is when the Collector has not acted on the protested payment for a long time, the continued inaction of the Collector or Commissioner should not be allowed to prejudice the taxpayer. (Nestle Phils., Inc. v. Court of Appeals, GR No. 134114, July 6, 2001). (BAR 2002)

2. On June 16, 1997, the Bureau of Internal Revenue (BIR) issued against the Estate of Jose de la Cruz a notice of deficiency estate tax assessment, inclusive of surcharge, interest and compromise penalty. The Executor of the Estate of Jose de la Cruz (Executor) filed a timely protest against the assessment and requested for waiver of the surcharge, interest and penalty. The protest was denied by the Commissioner of Internal Revenue (Commissioner) with finality on September 13, 1997. Consequently, the Executor was made to pay the deficiency assessment on October 10, 1997. The following day, the Executor filed a Petition with the Court of Tax Appeals (CTA) praying for the refund of the surcharge, interest and compromise penalty. The CTA took cognizance of the case and ordered the Commissioner to make a refund. The Commissioner filed a Petition for Review with the Court of Appeals assailing the jurisdiction of the CTA and the Order to make refund to the Estate on the ground that no claim for refund was filed with the BIR. Is the stand of the Commissioner correct? Reason. (2%) SUGGESTED ANSWER: Yes. There was no claim for refund or credit that has been duly filed with the Commissioner of Internal Revenue which is required before a suit or proceeding can be filed in any court (Sec. 229, NIRC of 1997). The denial of the claim by the Commissioner is the one which will vest the Court of Tax Appeals jurisdiction over the refund case should the taxpayer decide to appeal on time. (BAR 2000) 3. On the basis of a warrant of seizure and detention issued by the Collector of Customs for the purpose of enforcing the Tariff and Customs Laws, assorted brands of cigarettes said to have been illegally imported into the Philippines were seized from a store where they were openly offered for sale. Dissatisfied with the decision rendered after hearing by the Collector of Customs on the confiscation of the articles, the importer filed a petition for review with the Court of Tax Appeals. The Collector moved to dismiss the petition for lack of jurisdiction. Rule on the motion. (2%) SUGGESTED ANSWER: Motion granted. The Court of Tax Appeals has Jurisdiction only over decisions of the Commissioner of Customs in cases involving seizures, detention or release of property affected. (Sec. 7, RA. No. 1125). There is no decision yet of the Commissioner which is subject to review by the Court o f Tax Appeals.  ALTERNATIVE ANSWER: Motion granted. The Court of Tax Appeals has no jurisdiction because there is no decision rendered by the Commissioner of Customs on the seizure and forfeiture case. The taxpayer should have appealed the decision rendered by the Collector within fifteen (15) days from receipt of the decision to the Commissioner of Customs. The Commissioner is adverse decision would then be the subject of an appeal to the Court of Tax Appeals. Under the same facts, could the importer file an action in the Regional Trial Court for replevin on the ground that the articles are being wrongfully detained by the Collector of Customs since the importation was not illegal and therefore exempt from seizure? Explain. (3%) Page | 239

SUGGESTED ANSWER: No. The legislators intended to divest the Regional Trial Courts of the jurisdiction to replevin a property which is a subject of seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined by the simple device of replevin. (De Ia Fuente v. De Veyra, et aL, 120 SCRA 455) There should be no unnecessary hindrance on the government’s drive to prevent smuggling and other frauds upon the Customs. Furthermore, the Regional Trial Court do not have jurisdiction in order to render effective and efficient the collection of import and export duties due the State, which enables the government to carry out the functions it has been instituted to perform. (Jiao, et aL, Court of Appeals, et aL, and companion case, 249 SCRA 35, 43) (BAR 2000) (i) Suspension of collection of tax

1. What are the conditions that must be complied with before the Court of Tax Appeals may suspend the collection of national internal revenue taxes? (3%) SUGGESTED ANSWER: The CTA may suspend the collection of internal revenue taxes if the following conditions are met: a. the case is pending appeal with the CTA; b. in the opinion of the Court the collection will jeopardize the interest of the Government and/ or the taxpayer; and c. the taxpayer is willing to deposit in Court the amount being collected or to file a surety bond for not more than double the amount of the tax (Sec. 11, RA 1125, as amended by RA 9282). 2. RR disputed a deficiency tax assessment and upon receipt of an adverse decision by the Commissioner of Internal Revenue, filed an appeal with the Court of Tax Appeals. While the appeal is pending, the BIR served a warrant of levy on the real properties of RR to enforce the collection of the disputed tax. Granting arguendo that the BIR can legally levy on the properties, what could RR do to stop the process? Explain briefly. (5%) SUGGESTED ANSWER: RR should file a motion for injunction with the Court of Tax Appeals to stop the administrative collection process. An appeal to the CTA shall not suspend the enforcement of the tax liability, unless a motion to that effect shall have been presented in court and granted by it on the basis that such collection will jeopardize the interest of the taxpayer or the Government (Pirovano v. CIR, 14 SCRA 832 [1965]). The CTA is empowered to suspend the collection of internal revenue taxes and customs duties in cases pending appeal only when: (1) in the opinion of the court the collection by the BIR will jeopardize the interest of the Government and/or the taxpayer; and (2) the taxpayer is willing to deposit the amount being collected or to file a surety bond for not more than double the amount of the tax to be fixed by the court (Section 11, R.A. NO. 1125). (BAR 2004) 3. May the Court of Tax Appeals issue an injunction to enjoin the collection of taxes by the Bureau of Internal Revenue? Explain.  ANSWER: Yes. When a decision of the Commissioner on a tax protest is appealed to the CTA pursuant to Sec. 11 of RA No. 1125 (law creating the CTA) in relation to Sec. 229 of the NIRC, such appeal does not suspend the payment, levy, distraint and/or sale of any of the taxpayer’s property for the satisfaction of his tax liability. However, when in the opinion of the CTA the collection of the tax may jeopardize the interest of the Government and/or the taxpayer, the Court at any stage of the proceedings may suspend or restrain the Page | 240

collection of the tax and require the taxpayer either to deposit the amount claimed or to file a surety bond for not more than double the amount with the Court. (BAR 1996) 4. For failure of Oceanic Company, Inc. (OCEANIC), to pay deficiency taxes of P20 Million, the Commissioner of Internal Revenue issued warrants of distraint on OCEANIC’s personal properties and levied on its real properties. Meanwhile, the Department of Labor through the Labor Arbiter rendered a decision ordering OCEANIC to pay unpaid wages and other benefits to its employees. Four barges belonging to OCEANIC were levied upon by the sheriff and later sold at public auction. The Commissioner of Internal Revenue filed a motion with the Labor Arbiter to annul the sale and enjoin the sheriff from disposing the proceeds thereof. The employees of - OCEANIC opposed the motion contending that Art. 110 of the Labor Code gives first preference to claims for unpaid wages. Resolve the motion. Explain.  ANSWER: The motion filed by the Commissioner should be granted because the claim of the government for unpaid taxes are generally preferred over the claims of laborers for unpaid wages. The provision of Article 110 of the Labor Code, which gives laborers’ claims for preference applies only in case of bankruptcy or liquidation of the employer’s business. In the instant case, Oceanic is not under bankruptcy or liquidation at the time the warrants of distraint and levy were issued hence, the opposition of the employees is unwarranted. (CIR vs. NLRC et at G.R No. 74965, November 9, 1994). (BAR 1995) a) Injunction not available to restrain collection 1. May the courts enjoin the collection of revenue taxes? Explain your answer. (2%) SUGGESTED ANSWER: As a general rule, the courts have no authority to enjoin the collection of revenue taxes. (Sec. 218, NIRC). However, the Court of Tax Appeals is empowered to enjoin the collection of taxes through administrative remedies when collection could jeopardize the interest of the government or taxpayer. (Section 11, RA 1125) (BAR 2001) (ii) Taking of evidence (iii) Motion for reconsideration or new trial

1. On August 5, 1997, Adamson Co., Inc. (Adamson) filed a request for reconsideration of the deficiency withholding tax assessment on July 10, 1997, covering the taxable year 1994. After administrative hearings, the original assessment of P150,000.00 was reduced to P75,000.00 and a modified assessment was thereafter issued on August 05, 1999. Despite repeated demands,  Adamson failed and refused to pay the modified assessment. Consequently, the BIR brought an action for collection in the Regional Trial Court on September 15,2000. Adamson moved to dismiss the action on the ground that the government’s right to collect the tax by judicial   action has prescribed. Decide the case. (5%) SUGGESTED ANSWER: The right of the Government to collect by judicial action has not prescribed. The filing of the request for reconsideration suspended the running of the prescriptive period and commenced to run again when a decision on the protest was made on August 5,1999. It must be noted that in all cases covered by an assessment, the period to collect shall be five (5) years from the date of the assessment but this period is Page | 241

suspended by the filing of a request for reconsideration which was acted upon by the Commissioner of internal Revenue (CIR v. Wyeth Suaco Laboratories, Inc., 202 SCRA 125 [1991]). (BAR 2002) 2. What are the requisites before a taxpayer's request for reinvestigation may be granted by the BIR? Discuss briefly.  ANSWER: A request for re-investigation refers to a plea for re- evaluation of an assessment on the basis of newlydiscovered evidence or additional evidence the taxpayer intends to present in the re-investigation.  ALTERNATIVE ANSWER: He must file a written protest stating his grounds therefor so that his protest could be granted. (BAR 1992) (2) Appeal to the CTA, en banc (3) Petition for review on certiorari to the Supreme Court c.Criminal cases (1) Institution and prosecution of criminal actions 1. Based on the Affidavit of the Commissioner of Internal Revenue (CIR), an Information for failure to file income tax return under Section 255 of the National Internal Revenue Code (NIRC) was filed by the Department of Justice (DOJ) with the Manila Regional Trial Court (RTC) against XX, a Manila resident. XX moved to quash the Information on the ground that the RTC has no jurisdiction in view of the absence of a formal deficiency tax assessment issued by the CIR. Is a prior assessment necessary before an Information for violation of Section 255 of the NIRC could be filed in court? Explain. (4%) SUGGESTED ANSWER: No. In the case of failure to file a return, a proceeding in court for the collection of the tax may be filed without an assessment. (Sec. 222(a), NIRC). The tax can be collected by filing a criminal action with the RTC because a criminal action is a mode of collecting the tax liability. (Sec. 205, NIRC). Besides, the Commissioner is empowered to prepare a return on the basis of his own knowledge, and upon such information as he can obtain from testimony or otherwise, which shall be prima facie correct and sufficient for legal purposes (Sec. 6(B), NIRC; The issuance of a formal deficiency tax assessment, therefore is not required. 2. Gerry was being prosecuted by the BIR for failure to pay - his income tax liability for Calendar Year 1999 despite several demands by the BIR in 2002. The Information was filed with the RTC only last June 2006. Geriy filed a motion to quash the Information on the ground of prescription, the Information having been filed beyond the 5-year reglementary period. If you were the judge, will you dismiss the Information? Why? 5% SUGGESTED ANSWER: No. The trial court can exercise jurisdiction. Prescription of a criminal action begins to run from the day of the commission of the violation of the law. The criminal violation was committed when Gerry willfully refused to pay despite repeated demands in 2002. Since the information was filed in June 2006, the criminal case was instituted within the five-year period required by law (Tupaz v. Ulep, 316 SCRA 118 [1999]; Sec. 281, NIRC). (BAR 2006)

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3. Danilo, 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. The accountant filed a falsified tax return by underdeclaring the sales and overstating the expense deductions by Danilo. What is the liability, if any, of the accountant? Discuss. SUGGESTED ANSWER: The accountant may be held criminally liable for violation of the Tax Code when he falsified the tax return by underdeclaring the sale and overstating the expense deductions. (Sec. 257, NIRC). If Danny's accountant is a Certified Public Accountant, his certificate as CPA shall automatically be revoked or cancelled upon conviction. (BAR 2005) 4. TY Corporation filed its final adjusted income tax return for 1993 on April 12,1994 showing a net loss from operations. After investigation, the BIR issued a pre-assessment notice on March 30, 1996. A final notice and demand letter dated April 15, 1997 was issued, personally delivered to and received by the company’s chief accountant. For willful refusal and failure of TY Corporation to pay the tax, warrants of distraint and levy on its properties were issued and served upon it. On January 10, 2002, a criminal charge for violation of the Tax Code was instituted in the Regional Trial Court with the approval of the Commissioner. The company moved to dismiss the criminal complaint on the ground that an act for violation of any provision of the Tax Code prescribes after five (5) years and, in this case, the period commenced to run on March 30,1996 when the pre-assessment was issued. How will you resolve the motion? Explain your answer. (5%) SUGGESTED ANSWER: The motion to dismiss should not be granted. It is only when the assessment has become final and unappealable that the 5-year period to file a criminal action commences to run (Tupaz v. Ulep, 316 SCRA 118 [1999]). The pre-assessment notice issued on March 30,1996 is not a final assessment which is enforceable by the BIR. It is the issuance of the final notice and demand letter dated April 15,1997 and the failure of the taxpayer to protest within 30 days from receipt thereof that made the assessment final and unappealable. The earliest date that the assessment has become final is May 16,1997 and since the criminal charge was instituted on January 10, 2002, the same was timely filed. (BAR 2002) 5. Mr. Chan, a manufacturer of garments, was investigated for failure to file tax returns and to pay taxes for the taxable year 1997. Despite the subpoena duces tecum issued to him, he refused to present and submit his books of accounts and allied records. Investigators, therefore, raided his factory and seized several bundles of manufactured garments, supplies and unpaid imported textile materials. After his apprehension and based on the testimony of a former employee, deficiency income and business taxes were assessed against Mr. Chan on April 15, 2000. It was then that he paid the taxes. Criminal action was nonetheless instituted against him in the Regional Trial Court for violation of the Tax Code. Mr. Chan moved to dismiss the criminal case on the ground that he had already paid the taxes assessed against him. He also demanded the return of the garments and materials seized from his factory. How will you resolve Mr. Chan’s motion? (5%)

SUGGESTED ANSWER: The motion to dismiss should be denied. The satisfaction of the civil liability is not one of the grounds for the extinction of criminal action (People v. Ildefonso Tierra, 12 SCRA 666 [1964]). Likewise, the payment of the tax due after apprehension shall not constitute a valid defense in any prosecution for violation of any provision of the Tax Code (Sec. 253[a], NIRC). However, the garments and materials seized from the Page | 243