ESSAY QUESTIONS

I
Gold and Silver Corporation gave extra 14th month bonus to all its officials 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 ordinary and necessary expense that should be
allowed.
If you were the BIR Commissioner, how will you resolve the issue? 2.5%
I will disallow the expense. A bonus is ordinary and
necessary where said expenditure is (1) appropriate and helpful in
the development of the taxpayers business (Martens, Law of Federal
Income Taxation, Volume IV, p. 315) and (2) is normal in relation to
the business of the taxpayer and the surrounding circumstances (p.
316, Ibid).
To determine the reasonableness of the bonus it must be
commensurate with services performed by the officials and
employees. Other factors to consider are whether the payment was
made in good faith; the character of the taxpayer's business; the
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 general economic
conditions (Atlas Mining v. CIR, G.R. No. L- 26911, January 27,
1981). However, since the business suffers from a net operating loss, I
will rule that the bonus is an unreasonable expense.
II
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 sale 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%

I will resolve the issue in favor of Joachin. In auction sales of

property for tax delinquency, notice to delinquent landowners and to
the public in general is an essential and indispensable requirement of
law, the non-fulfillment of which vitiates the same (Tiongco v. Phil.
Veterans Bank, G.R. No. 82782, Aug. 5, 1992). The failure to give notice to
the right person i.e., the real owner, will render an auction sale void
(Tan v. Bantegui, G.R. No, 154027, October 24,
2005; City Treasurer of Q.C. v. CA, G.R. No. 120974, Dec. 22, 1997).
2.

Assuming Joachin is a registered owner, will your answer be the same?

2.5%

Yes. The law requires that a notice of the auction sale must
be properly sent to Joachin and not merely through publication (Tan v.
Bantegui, G.R. No, 154027, October 24,2005; Estate of Mercedes Jacob
v. CA, G.R. No. 120435, Dec. 22, 1997).
III
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
some of its raw materials. The ruling is of first impression, which means the
interpretations made by the Commissioner of Internal Revenue is 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.
a.

What are BIR rulings? 2.5%

A BIR ruling is an administrative interpretation of the Revenue
Law as applied and implemented by the Bureau. They can be relied upon
by taxpayers and are valid until otherwise determined by the courts or
modified or revoked by a subsequent ruling or opinion. They are accorded
great weight and respect, but not binding on the courts. (Commission v.
Ledesma, L-17509, January 30, 1970).
b.

What is required to make a BIR ruling of first impression a valid one? 2.5%
A BIR ruling of first impression, to be a valid ruling, must be
issued within the scope of authority granted to the Commissioner of
Internal Revenue, and not contravene any law or decision of the Supreme
Court. (Michelle J. Lhuiller v. CIR, G.R. No. 150947, July 15, 2003; Sec. 7,
NIRC)
c.
Does a BIR ruling have a retroactive effect, considering the principle that tax
exemptions should be interpreted strictly against the taxpayer? 2.5%
A BIR ruling cannot be given retroactive effect if it would be
prejudicial to the taxpayer. Section 246 of the NIRC provides for
retroactive effect in the following cases: 1. Where the taxpayer

deliberately mis-states or omits material facts from his return or any

document required of him by the Bureau of Internal Revenue; 2. Where
the facts subsequently gathered by the Bureau of Internal Revenue are
materially different from the facts on which the rulings is based; or 3.
Where the taxpayer acted in bad faith (Section 246, NIRC).
IV
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 P1, 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.
a.
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. 2.5%
The RDO has no discretion. The only value that can be applied is
the zonal value as fixed and determined by the Commissioner. (Section
6[E], NIRC).
b.
Should the difference in the supposed taxable value be legally subject to
donor's tax? Reason briefly. 2.5%
By applying the fixed zonal value, there should be no difference in
the taxable value and the declared value that might be subject of a
donors tax. However, assuming that such a difference may exist, the
variance in price may raise a legal presumption of an intended donation.
A demand gift arises only if tax is avoided as a result of selling
property at a price lower than its fair market value. In a sale subject to 6%
capital gains tax, the tax is always based on the gross selling price or fair
market value whichever is higher. This means, therefore, that the deemed
gift provision under the Tax Code will not apply because the 6% capital
gains tax can be applied to the higher value
V
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
moth each.

a.

Does the US$1, 000 pension become taxable because he is now residing
in the Philippines? Reason briefly. 2.5%
Answer: No, the US$1,000 pension is excluded from gross income
because it is received by a Filipino resident or non-resident 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)

b.

Is his purchase of the three condominium units subject to any tax? Reason
briefly. 2.5%
Answer: Yes, the purchase of the 3 condominium units is subject
to: 1. Documentary stamp tax (payable by either seller or
purchaser) (Section 196, NIRC);2. Local transfer tax imposed
under the Local Government Code (Sec. 134, LGC) 3. Value added
tax, if Z purchased the units from real estate developers and/or
real estate lessors; and 4. Income tax, either capital gains tax or
regular income tax, depending on whether the condominium is
regarded as a capital asset or an ordinary asset of the seller
Alternative Answer: Strictly speaking, purchase is not a
taxable event under the Internal Revenue Code, except for the
requirement of documentary stamp tax in the case of real
property. (Sec. 196, NIRC) c. Will Z be liable to pay income tax on
the P45,000 monthly income? Reason briefly. Yes, Z shall be liable
to pay income tax since he is now a taxpayer engaged in the
business of leasing real property (Section 42[A][4], NIRC

VI
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.
a.
Does the JVA entered into by and between Weber and Prime create a
separate taxable entity? Explain briefly. 2.5%
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).

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. 2.5%
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-192-200, 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.
2.5%
Yes, the sale by Weber and Prime of their respective shares results
in the realization of income subject to income tax and expanded
withholding tax. (BIR Ruling DA-228-2006).
VII
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, 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?
2.5%
Yes, the Commissioner may extend the payment of the tax subject to
the following conditions: 1. Timely payment would impose undue hardship
upon the estate or the heirs; 2. Posting of a bond exceeding double the
amount of the tax may be required by the Commissioner; 3. The extension
shall not exceed 2 years in case of extrajudicial settlement of the estate or
5 years in case of judicial settlement. (Sec. 91, NIRC)
b.
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. 2.5%
No. The value of the gross estate shall be determined at the time
of death of the decedent. (Sections 85 and 90[A][1], NIRC)