BAR EXAMINATION

QUESTION IN
TAXATION
(2005)

a) 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.
b) May taxes be the subject of set-off or compensation? Explain.
c) Can an assessment for a local tax be the subject of set-off or
compensation against a final judgement for a sum of money obtained
by the taxpayer against the local government that made the
assessment? Explain.
d) Is a deficiency tax assessment a bar to a claim for tax refund or taxa
credit? Explain.
e) Is the approval of the court, sitting as probate or estate settlement
court, required in the enforcement and collection of estate tax?
Explain. (10%)

II

(1)Explain briefly whether the following items are taxable or non-taxable:

a) Income from jueteng:
b) Gain arising from expropriation of property:
c) Taxes paid and subsequently refunded:
d) Recovery of bad debts previously charged off:
e) Gain on the sale of a car used for personal purposes. (5%)
(2)State and discuss briefly whether the following cases may be
compromised or may not be compromised:
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%)

III

(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 territorial jurisdiction in addition to the basic real property tax. If
the lot owners of a subdivision located in the said city seek your legal
advice on the matter. What would your advice be? Discuss. (5%)

(2)

a)
State and explain the basis of dutiable value of an imported
article subject to an ad valorem tax under the Tariff and Customs Code.
b)
Distinguish countervailing duty from dumping duty. (5%)
(3)

Jacob, after serving a 5-year tour of duty as military attached 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%)

IV

(1)

State with reasons the tax treatment of the following in the

preparation of annual income tax returns:
a) Proceeds of life insurance received by a child as irrevocable
beneficiary;
b) 13th month pay and de minimis benefits;

c) Dividends received by a domestic corporation from (i) another

domestic corporation; and (ii) a foreign corporation;
d) Interest on deposits with (i) BPI Family Bank; and (ii) a local
offshore banking unit of a foreign bank;
e) Income realized from sale of (i) capital assets and (ii) ordinary
assets. (5%)

(2) a)
State the conditions required by the Tac Code before the
Commissioner of Internal Revenue could authorize the refund or credit
of taxes erroneously or illegally received.
b) Does a withholding agent have the right to file an application for
tax refund? Explain. (5%)

A taxpayer received a tax deficiency assessment of P1.2 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 taxpayers.
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%)

VI

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 under declaring the
sales and overstating the expense deductions by Danilo.
Is Danilo liable for the deficiency tax and the penalties there on? What
is the liability, if any, of the accountant? Discuss. (5%)

VII

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%)

VIII

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%)

IX

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 services. 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 Tax
Code? Decide with reasons. (5%)

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%)

XI

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%)

XII

Ralph Donald, 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 rest house 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 stocks 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%)

XIII

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 files
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%)

XIV

(1) Mr. Fermin, a resident of Quezon City, is a Certified Public AccountantLawyer 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%)

(2)In 1995, the BIR filed before the Department of Justice (DOJ) a criminal
complainant 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 liabilities; 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 filling 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%)