Tax Mock Bar Suggested Answers Final

JURISTS BAR REVIEW CENTER ™ Suggested Answers to 2016 Taxation Law Mock Bar Examination

I

The filing of the motion for reconsideration is improper and the subsequent appeal to the CTA should be dismissed. Under the NIRC, the proper remedy from the notice of deficiency income tax and VAT is to file an administrative protest within 30 days from receipt of the notice. Here XYZ filed a motion for reconsideration instead of the required administrative protest. Hence the notice for deficiency income tax and VAT has become final and executory. II

(a) Abet is not subject subject to the income tax but to the the percentage percentage tax. tax. Under the NIRC, sale of shares of stock listed and traded through a local stock exchange is subject to the percentage tax of ½ of 1% of the gross selling price. Here the BPI shares are listed and traded at the PSE, a local stock exchange. Hence the sale thereof is subject to the percentage tax of ½ of 1% of the gross selling price of P1,000,000 or P5,000. (b) Yes Abet is subject to income tax on the capital gain of P200,000 or P15,000. Under the NIRC, sale of shares not sold through the stock exchange are subject to income tax of 5% of the capital gain not exceeding P100,000 and 10% where such capital gain exceeds P100,000. Here the BPI shares were sold not through the stock exchange but directly to the buyer Binny and the capital gain exceeded P100,000. Hence the capital gain is subject to income tax of 5% of P100,000 or P5,000 and 10% of the excess of P100,000 or P10,000 for a total tax of P15,000. III

(a) The assessment of donor’s tax against Cromwell was not proper. Under the Law on Gift Taxes, a renunciation of hereditary share in favor of a co-heir is not a donation subject to donor’s tax since the title to the pr operty pr operty is not deemed to have vested in favor of the repudiating share. Suggested Answers in Jurists Mock Bar Examinations in Taxation Law. All rights reserved 2016 by Jurists Review Center Inc.

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Here Cromwell renounced his hereditary share in favor of his co-heirs Arky and Brankov. Hence the renunciation is not a donation and thus the assessment of donor’s tax against Cromwell is improper. (b) No, my answer would not be the same if Cromwell renounced his share in favor of Arky only. In that case, the assessment of donor’s tax would be proper. Under the Law on Gift Taxes, a renunciation of hereditary share in favor of one or some but not all of the co- heirs is a donation subject to donor’s tax since the title to the property is deemed to have vested in favor of the repudiating share. Here Cromwell renounced his hereditary share in favor of his co-heirs Arky only but not in favor of the other co-heir Brankov. Hence the renunciation is a donation and thus the assessment of donor’s tax against Cromwell is proper. IV

(a) Yes, Wilma was justified in filing the motion before the CTA. Under the Law on Taxation, the CTA has the power to issue injunctive writs in cases falling within its jurisdiction. Here the CTA had jurisdiction over the case. Hence it can issue the writ of injunction and thus Wilma was justified in filing her motion. (b) No, a compromise of the tax liabilities is no longer possible. Under the Law on Taxation, compromise may be granted upon either of two grounds namely, reasonable doubt on the validity of the assessment or financial incapacity. Here, compromise may not be based on the first ground since the CTA had already ruled for the validity of the assessment which decision became final when no appeal was taken thereon. Neither could the compromise be based on the second ground it appearing that Wilma, the appellant, had deposited in court the amount of tax liability in support of her application for injunction. Hence a compromise is no longer possible. V

No, Mario should not appeal to the CTA yet. Under the Law on Taxation, what may be appealed to the CTA is the decision or inaction of the Commissioner in a disputed assessment case. An assessment is disputed by filing a protest against the FAN. Suggested Answers in Jurists Mock Bar Examinations in Taxation Law. All rights reserved 2016 by Jurists Review Center Inc.


Here, it is not enough that a protest was filed and directed against the PAN. Neither may it be said that the FAN constituted a decision on the protest in the absence of an express statement to that effect in said FAN. Hence Mario should not appeal to the CTA yet. VI

(a) The claim for exemption is denied. Under the NIRC, VAT is an indirect tax imposed on every sale of goods in the course of trade or business regardless of whether or not the buyer is not engaged in trade or business. Here what is involved is the sale of goods or construction materials. Hence the Iglesia ni Kristo is not exempt from the VAT on the purchase of the materials. (b) The claim for exemption is granted. Under the Local Government Code of 1991, all real properties actually, directly, and exclusively used for religious purposes are not subject to tax. The Constitution also provides that Churches, including all lands, building, and improvements, actually, directly, and exclusively used for religious purposes are exempt from real property tax; (c) The claim for exemption is granted. Section 32 of the NIRC provides that gifts, bequests, and devises do not form part of the gross income of the recipient. The NIRC also provides that gifts in favor of religious institutions are exempt from donor’s tax. (d) The claim for exemption is denied. The Constitution does not exempt religious institutions from payment of tariff and customs duties. VAT will also be imposed on the importation in accordance with the provisions of the NIRC. VII

I would grant the motion to dismiss filed by the taxpayer. The Supreme Court has held that the power of the CTA includes that of determining whether or not there has been grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the RTC in issuing an interlocutory order in cases falling within the exclusive appellate jurisdiction of the tax court. Here the order of the RTC granting the application for a writ of preliminary injunction is an interlocutory order and the exclusive appellate jurisdiction over local tax cases decided by the RTC is with the CTA. Suggested Answers in Jurists Mock Bar Examinations in Taxation Law. All rights reserved 2016 by Jurists Review Center Inc.


Hence it is the CTA not the CA which has jurisdiction over the case and thus the taxpayer’s motion to dismiss should be granted. VIII

(a) (i)

Liable. Fees and taxes are different; the former are levied in the exercise of police power, while the latter power of taxation. The exemption from taxes does not cover exemption from fees.

(ii)

Not liable. Local business tax does not apply to a taxpayer who is subject to franchise tax.

(iii)

Liable. A GOCC exercising a franchise is generally subject to franchise tax. It will only be exempt if the GOCC’s franchise ex plicitly and/or undoubtedly exempts it from local franchise tax. X’s franchise does not categorically exempt X from paying the local franchise tax. In case of doubt, the doubt shall be ruled against the claimant (i.e., X) and in favor of the LGU.

(iv)

Not liable. As a rule, local government units are prohibited from assessing wharfage fees unless the wharf belongs to the local government unit collecting such fees. Thus, if the wharf belongs to Davao City, it may validly collect fees for the use of its wharf. Otherwise, it cannot do so since there will be local double taxation.

(v)

Liable. A local government unit may validly collect toll from the use of selffunded roads. The law only provides limited exempt persons. X is not one of them. However, the fee may not be based on the goods carried by the vehicle; otherwise, it may amount to a prohibited export/import tax.

(vi)

Not liable. Under the Law on Real Property Taxation, a machinery or equipment actually, directly and exclusively used by a GOCC for generation of power is exempt from real property tax. This exemption applies even if the charter of such GOCC does not provide for such exemption.

(vii)

Liable. The real property exemption of X only extends to machineries and equipment, and does not extend to a building that houses such machineries and equipment. The same is true even if the building is incidental to the operation of such machineries and equipment. In case of doubt, the claim of exemption shall be strictly construed against the claimant.

(viii)

Liable. Like the building, the land is not exempt from real property tax. The law only extends the real property exemption to machineries and equipment, and not to buildings and land, actually, directly and exclusively used by GOCC in the generation of electric power. (b)

It will not matter, since X’s Charter does not explicitly and equivocally exempt it from local and real property taxes. For X to be exempt from these taxes, its Charter must explicitly provide such exemptions. In the latter case, X’s Charter will prev ail being a special law enacted after the effectivity of the Local Government Code.

Suggested Answers in Jurists Mock Bar Examinations in Taxation Law. All rights reserved 2016 by Jurists Review Center Inc.


(c) (i)

No. The Revenue Ordinance is specifically directed at X, and not to all GOCCs with similar circumstances. It violates the equal protection clause of the Constitution.

(ii)

X has 30 days (from the effectivity of the ordinance) to question its validity before the Secretary of Justice. The latter in turn has 60 days to act on the same. In case of inaction, X may file a petition with the Regional Trial Court questioning its validity. The petition must be filed within 30 days, following the end of the 60-day period. Under exceptional circumstances (such as when the issue is of utmost importance requiring immediate intervention by the courts), X may immediately file a petition for declaratory relief with the regional trial courts, or a petition for certiorari or prohibition with the Supreme Court.

(iii)

Yes. Courts are not prohibited from enjoining the immediate implementation of the ordinance and the collection of the corresponding tax. However, X must establish that it has a clear right that ought to be protected, and such right is in imminent danger of being violated causing an irreparable damage unless the court issues the writ of injunction. In the context of taxation, damage is considered to be irreparable if the asset to be seized is vital to its operation such that its seizure will paralyze the business causing irreparable loss to the taxpayer.

(iv)

Yes, X can be held liable for surcharge in case of non-payment of delinquent local taxes. There is no surcharge for non-payment of real property tax. There is interest in both cases. The rate of surcharge or interest will be as provided in the Local Government Code, which supplements the Revenue Ordinance. In particular, the surcharge is 25% of the amount due, and interest is 2% per month, but for a period not to exceed 36 months.

(v)

As a rule, the local treasurer may issue an assessment within 5 years, reckoned from the date of accrual of tax assessed. The exception is when there is fraud or intent to evade the tax. The law provides instances when the prescriptive period is suspended, among others, when the treasurer is legally prevented from making the assessment or collection (e.g., when there is injunction issued by a court) or when the taxpayer requests for a reinvestigation and executes a written waiver of the prescriptive period. IX

(a) Special duties imposed by the Secretary of Finance upon the recommendation of the Tariff Commission to combat under-priced imports when such imports would cause or likely cause injury to local industries. (b) Special duties imposed by the Secretary of Finance upon prior investigation and report of the Tariff Commission to offset an excise or inland tax upon articles of the same class manufactured at home or subsidies to foreign producers or manufacturers by their respective governments. (c) Special duties imposed on articles not properly marked, collected by the Commissioner. The purpose of the surtax is to prevent possible deception of the consumers. Suggested Answers in Jurists Mock Bar Examinations in Taxation Law. All rights reserved 2016 by Jurists Review Center Inc.


(d) Special duties imposed by the President against goods of a foreign country which discriminates against Philippine commerce or Philippine goods. X

No, Mr. Francisco did not derive any income from the cancellation or condonation of his indebtedness. Under the Civil Code, remission or condonation of obligations is considered a donation. [Art. 1270, Civil Code] Here there was no consideration for the condonation of the debt. Hence the same is considered as a gift or donation and should not be included in Mr. Francisco’s gross income. XI (a) Under the NIRC, the amount of the proceeds of the life insurance is excluded in the gross income and shall be exempt from taxation [Section 32 (B) (1), NIRC]. (b) Under the NIRC, the amount of the 13 th month pay received by an employee which does not exceed P30,000 is excluded in the gross income and shall be exempt from taxation [Sec. 32 (B) (7) (e), NIRC] (c) The stock dividends are not subject to tax. Stock dividends are not realized income. (d) Bitoy’s free lodging is not taxable. Under the NIRC, tax on fringe benefits received by employees are payable by the employer. (Sec. 33 (A), NIRC] (e) Under the law on income taxation, the meal allowance is considered a de minimis benefit and are non-taxable fringe benefits. They are tax exempt and exempt from the imposition of the fringe benefits tax. (f) Under the law on income taxation, the uniform allowance is considered a de minimis benefit and are non-taxable fringe benefits. They are tax exempt and exempt from the imposition of the fringe benefits tax. XII

Yes, the assessment was proper. Under the Local Government Code, real property owned by a political subdivision of the Republic of the Philippines is not exempt from realty tax if the beneficial use of the real property has been granted to a taxable person. Here the beneficial use, that is for business operations, of the land and the warehouse has been granted to a taxable person, Mr. Llamado. Suggested Answers in Jurists Mock Bar Examinations in Taxation Law. All rights reserved 2016 by Jurists Review Center Inc.


Hence the land and the warehouse are subject to realty tax and thus the assessment was proper. XIII

No, the lot owner’s contentions are not legally tenable. (1) The contention that the capital gains tax is not applicable in involuntary sales is not legally tenable. Under the Law on Taxation, the term sale or exchange which is subject to capital gains tax has been interpreted liberally and thus the capital gains tax is applicable to involuntary or forced sales. Here the expropriation sale was involuntary or forced. Hence the capital gains tax is applicable to an expropriation sale. (2) The lot owner’s contention that the 6% capital gains tax is a liability of the buyer is not legally tenable. Under the NIRC, the tax is imposed on the capital gains from the sale of land. Clearly the one who makes the capital gains in a sales transaction is the seller not the buyer. Hence the lot owner’s contentions are not legally tenable. XIV

No, the BIR is not correct is arguing that the house and lot were transferred in contemplation of death. Under the NIRC, a bona fide sale for an adequate and full consideration in money or money’s worth is not deemed as a transfer in contemplation of death. [Sec. 85(B)] Here the sale or transfer of the lot from Mr. Mortal to his son was for an adequate and full consideration. Hence the BIR is not correct in its argument. XV

Yes, the BIR Commissioner should agree to obtain the bank information and provide the same to the IRS. Under the NIRC, the BIR Commissioner has the power to inquire into bank deposits upon request for tax information by a foreign tax authority under an international convention or agreement and to provide the information obtained to the foreign tax authority. [Sec. 6(f)]



XVI

The grounds I may raise to question the imposition are the following: (a) The power to tax may not be exercised by the mayor through the issuance of an executive order. Under the Local Government Code, the power to tax is legislative in nature and any imposition of a tax, fee or charge or the generation of revenue shall be exercised by the Sanggunian of the local government concerned through an appropriate ordinance. (b) A municipality may not levy a transfer tax on real property. Under the Local Government Code, a municipality may not levy a tax which is levied by a province. The transfer tax on realty is levied by provinces. Hence a municipality may not levy the same. [Sec. 142 in relation to Sec. 145, LGC]. XVII

Only the malpractice insurance is allowable as a deduction. Under the National Internal Revenue Code, ordinary and necessary expenses paid or incurred in carrying on any trade or business may be deducted as business or professional expenses. Here items (a) and (b) are not deductible as they were incurred not in the practice of the profession but to obtain a license to practice. Item (d) is not deductible as the Supreme Court has held that a business expense must not be against the law or public policy and the amount was spent to influence a judge in rendering his decision. The malpractice insurance may be deemed as necessary in carrying on the practice of law as a the risk of incurring a huge liability while practicing law has to be guarded against. XVIII

Yes, the estate left by the decedent is exempt from the payment of the estate tax. Under the Law on Taxation, only the amount of the net estate in excess of P200,000 is taxable. Here applying the standard deduction of P1 million against the gross estate of P1.1 milion, the net estate would be only P100,000 which is not in excess of P200,000 and thus is not taxable. -oOo-



Tax Mock Bar Suggested Answers Final

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