Bar Questions in Taxation 1987-2001

TAX LAW REVIEWER
1 SAINT LOUIS UNIVERSITY BAR OPERATIONS
Direct Taxes are taxes wherein both the incidence

GENERAL PRINCIPLES (or liability of the payments of the tax) as well as the impact or
burden of the tax falls on the same person. An example of this
Power of Taxation tax is income tax where the person subject to the tax cannot
shift the burden of the tax to another person.
1. Justice Holmes once said: The power to tax is not the
power to destroy while this Court (the Supreme Court) sits. Indirect Taxes, on the other hand, are taxes wherein
Describe the power to tax and its limitations. (#1, 2000 Bar the incidence of or the liability for the payment of the tax falls on
Exams) the person but the burden thereof can be shifted or passed on to
another person. Example of this tax is the value-added tax.
Suggested Answer: Alternative Answer:

The power to tax is an inherent power of the A direct tax is a tax which is demanded from the
sovereignty which is exercised through the legislature to person who also shoulders the burden of the tax. Example:
impose burdens upon subjects and objects within its corporate and individual income tax. An indirect tax is a tax
jurisdiction for the purpose of raising revenues to carry out which is demanded from a person in the expectation and
the legitimate objects of government. The underlying basis intention that he shall indemnify himself at the expense of
for its exercise is governmental necessity for without it, no another, and the burden finally resting on the ultimate purchaser
government can exist nor endure. Accordingly, it has the or consumer. Example: value-added tax.
broadest scope of all the powers of government because in
the absence of limitations, it is considered an 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 4. May the collection of taxes be barred by prescription?
the Courts role to see to it that the exercise of the power Explain your answer. (#3a, 2001 Bar Exams)
does not transgress these limitations.
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
2. May a taxpayer who has pending claims for government to collect taxes becomes imprescriptible.
VAT input credit or refund, set-off said claims against his other ----------------------------------------------------------
tax liabilities? Explain your answer. (#1, 2001 Bar Exams)
5. Taxes were generally imprescriptible; statutes
Suggested Answer: however, may provide other wise. State the rules that have been
No. Set-off is available only if both obligations are adopted on this score by
liquidated and demandable. Liquidated debts are those where
the exact amounts have already been determined. In the instant (a) The National Internal Revenue Code;
case, the claim of the taxpayer for VAT refund is still pending
and the amount is still to be determined. A fortiori, the liquidated (b) The Tariff and Costumes Code; and
obligation of the taxpayer to the government cannot, therefore,
be set-off against the unliquidated claim which the taxpayer (c) The Local Government Code (#4, 1997 Bar Exams)
conceived to exist in his favor. ( Philex Mining Corp v. CIR,
August 29, 1998) Suggested Answer:
Alternative Answer: The rules that have been adopted on prescription are
as follows:
No. Taxes and claims for refund cannot be the subject
of set-off for the simple reason that the government and the (a) National Internal Revenue Code the statue of
taxpayer are not creditors and debtors of each other. There is limitation for assessment of tax if return is filed is within three (3)
material distinction between a tax and a claim for refund . years from the last day prescribed by the law for the filing of the
Claims for refunds just like debts are due from the governments return or if filed after the last day, within three years from the
in its corporate capacity, while taxes are due to the government date of actual filing. If no return is filed or the return filed is false
in its sovereign capacity. (Philex Mining Corp v. CIR, August 29, or fraudulent, the period to asses is within ten years from the
1998) discovery of the omission, fraud or falsity.
The period to collect the tax is within three years from
---------------------------------------------------------- date of assessment.
In the case, however, of omission to file or if the return
3. Distinguish direct taxes from indirect taxes, and give filed is false or fraudulent, the period to collect is within ten
an example for each one. (#2b, 2001 Bar Exams) years from the discovery without the need of an assessment.
Suggested Answer: (b) Tariffs and Costumes Code It does not

express any general statute of limitation; it provided, however,
Prepared by the TAX LAW SECTION Chief JOCELYN ROSARIO Assistant Chief SOCRATES PADUA Members MONDAE BUENAFE,
MYLENE CANAO, MONALISA IBARRA, CESAR LACDAO, GLORIFE LICLICAN, DULCE MARTINEZ, ELILYN NATURA, DONNA
MICHELLE PINLAC, CECILYNNE ANDRADE and LOUBELLE ORTIZ. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE
OF LAW BAR OPERATIONS 2003.
TAX LAW REVIEWER
that when the articles have entered and passed free of duty or 1) There is no double taxation. Double taxation
final adjustments of duties made, with subsequent delivery, such means taxing for the same tax period the same thing or activity
entry and passage free of duty or settlement of duties will, after twice, when it should be taxed but once, by the same taxing
the expiration of one (1) year, from the date of the final payment authority for the same purpose and with the same kind or
of duties, in the absence of fraud or protest, be final and character of tax. The real estate tax is a tax on property: The
conclusive upon all parties, unless the liquidation of import entry real estate dealers tax is a tax on the privilege to engage in
was merely tentative (Sec. 1603, TCC). business: while the income tax is a tax on the privilege to earn
an income. These taxes are imposed by different taxing
(c) Local Government Code Local taxes, fees or authorities and are essentially of different kind and character
charges shall be assessed within five (5) years from the date ( Villanueva vs. City of Iloilo, 26 SCRA 578).
they become due. In the case of fraud or intent to evade the
payment of taxes, fees or charges the same maybe assessed
within ten years from discovery of fraud or intent to evade 2) For taxes imposed under the NIRC, protest
payment. They shall also be collected either by administrative or at the time of payment is required to preserve the taxpayers
judicial action within five (5) years from the date of assessment right to claim refund. This is clear under Section 230 of the
(Sec. 194 LGC). 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
6. (1) What are the basic features of the present
the taxpayers claim for refund. The procedure under the TCC is
income tax system?
to the effect that when a ruling or decision of the Collector of
(2) What is the nature of the power of taxation?
Customs is made whereby liability for duties is determined, the
(#1,1996 Bar Exams)
party adversely affected may protest such ruling or decision by
presenting to the Collector, at the time when payment is made,
Suggested Answer:
or within fifteen days thereafter, a written protest setting forth his
1) Our present income tax system can be said
objections to the ruling or decision in question ( Sec. 2308,
to have the following basic features:
TCC ).
a.) It has adopted a comprehensive tax situs by using the
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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
8. (1) Why are tax exemptions strictly constructed
derived from within the Philippines. Domestic corporations are
against the taxpayer?
also taxed on universal income while foreign corporations are
taxed only on income from within. (2) When may a taxpayers suit be allowed? (#4,
b.) The individual income tax system is mainly 1996 Bar Exams)
progressive in nature in that it provides graduated rates of
income tax. Corporations in general are taxed at a flat rate of Suggested Answer:
35% of net income.
c.) It has retained more schedular than global features 1) Tax exemptions are strictly construed
with respect to individual taxpayers but has maintained a more against the taxpayer because such provisions are highly
global treatment on corporations. disfavored and may almost be said to be odious to the law
(Manila Electric Company, Vera, 67 SCRA 351). The exception
2) The power to tax is an attribute to contained in the tax statutes must be strictly construed against
sovereignty and is inherent in the State. It is a power emanating the one claiming the exemptions because the law does not look
from necessity because it imposes a necessary burden to with favor on tax exemptions they being contrary to the life-
preserve the States sovereignty (Phil. Guarantee Co. vs. blood theory which is the underlying basis for taxes.
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. 2) A taxpayers suit may only be allowed when
an act complained of, which may include a legislative
enactment, directly involves the illegal disbursement of public
---------------------------------------------------------- funds derived from taxation (Pascual vs. Secretary of Public
Works, 110 Phil. 331).
7. (1) X, a lessor of a property, pays real estate tax on
the premises, a real estate dealers tax based on rental receipts
----------------------------------------------------------
and income tax on the rentals. X claims that this is double
taxation. Decide.
9. For failure of Oceanic Company, Inc.
(2) Is protest at the time of payment of taxes/duty a (OCEANIC), to pay deficiency taxes of P20 Million, the
requirement to preserve the taxpayers right to claim a refund? Commissioner of Internal Revenue issued warrants of distraint
Explain. (#2, 1996 Bar Exams) on OCEANICs personal properties and levied on its real
Suggested Answer: properties. Meanwhile, the Department of Labor through the
Labor Arbiter rendered a decision ordering OCEANIC to pay
TAX LAW REVIEWER
unpaid wages and other benefits to its employees. Four barges Under the global system, all income received by the
belonging to OCEANIC were levied upon by the sheriff and later taxpayer are grouped together without any deduction as to the
sold at public auction. type or nature of the income and after deducting therefrom
The Commissioner of Internal Revenue filed expenses and other allowable deductions are subjected to tax at
a motion with the Labor Arbiter to annul the sale and enjoin the fixed rate.
sheriff from disposing the proceeds thereof. The employees of
the OCEANIC opposed the motion contending that Art. 11o of
----------------------------------------------------------
the Labor Code gives first preference to claims for unpaid
wages.
Resolve the motion. Explain. (#5, 1995 Bar 11. 1) The police power, the power to tax and the power of
Exams) eminent domain are inherent powers of government. May a tax
be validly imposed in the exercise of the police power and not of
Suggested Answer: the power to tax? If your answer is in the affirmative, give an
example. (#1, 1991 Bar Exams)
The motion filed by the Commissioner should be
granted because the claim of the government for unpaid taxes is Suggested Answer:
generally preferred over the claims of laborers for unpaid
wages. The provision of Article 110 of the Labor code, which The police power may be exercised for the purpose of
gives laborers claims for preference applies only in case of requiring licenses for which license fees may have to be paid.
bankruptcy or liquidation of the employers business. In the The amount of the license fees for the regulation of useful
instant case, Oceanic is not under bankruptcy or liquidation at occupations should only be sufficient to pay for the cost of the
the time the warrants of distraint and levy were issued hence, license and the necessary expense of police surveillance and
the opposition of the employees is unwarranted (CIR vs. NLRC regulation. For non-useful occupations, the license fee may be
et. Al, G.R. No. 74965, November 9,1994). sufficiently high to discourage the particular activity sought to be
regulated. It is clear from the foregoing that the police power
---------------------------------------------------------- may not be exercised by itself alone for the purpose of raising
tax. However, police power may be exercised jointly with the
power of taxation fort he purpose of raising revenues. (Lutz vs.
10. (1) What is the principle of mobilia sequuntur
Araneta, 98 Phil. 148)
personam in income taxation? (#.2, 1994 Bar Exams)
Alternative Answer:
(2) Distinguish a direct from an indirect tax. (#.3, 1994
Bar Exams)
Taxation involves the power to raise revenue not only
in order to support the existence of government but likewise to
(3) Distinguish schedular treatment from global
carry out legitimate objects of government. Among such
treatment as used in income tax. (#3, 1994 Bar
legitimate objects are those that police power itself can cover.
Exams)
As early as the case of Lutz vs. Araneta (98 Phil. 148), the
Supreme Court has ruled that the taxation may be used to
implement an object of police power. An illustration of such
Suggested Answer:
exercise would be an imposition of taxes on gambling, the rates
of which are made somewhat onerous in order to discourage
1) Principle of mobilia sequuntur personam in income
gambling instead of an outright prohibition thereof by an
taxation refers to the principle that taxation follows the
exercise of a police power measure such as by present
property or person shall be subject to the tax.
provisions of the Revised Penal Code.
2) A direct tax is one in which the taxpayer who pays the
2) Discuss the meaning and the implementations of
tax is directly liable therefor, that is, the burden of
the following statement:
paying the tax falls directly on the person paying the
tax.
Taxes are the lifeblood of government and their
prompt and certain availability is an imperious need.
An indirect tax is one paid by a person who is not directly
liable therefor, and who may therefore shift or pass on tax to
Suggested Answer:
another person or entity, which ultimately assumes the tax
burden. (Maceda v. Macaraig. 197 SCRA 771)
The phrase, taxes are the lifeblood of government,
etc. expresses the underlying basis of taxation which is
3) Distinction between :scheduler treatment and global
governmental necessity, for indeed, without taxation, a
Treatment as used in income taxation:
government can either nor endure. Taxation is the indispensable
and inevitable price for civilized society; without taxes, the
Under a scheduler system, the various types/items of
government would be paralyzed. This phrase has been used, for
income (i.e. Compensation; business/professional income)
instance, to justify the validity of the laws providing for summary
are classified accordingly and are accorded different tax
remedies in the collection of taxes. As a consequence of the
treatments in accordance with schedules characterized by
above rule, an injunction against the assessment and collection
graduated tax rates. Since these types of income are
of taxes is generally withheld be the laws imposing such taxes.
treated separately, the allowable deductions shall likewise
Even when it is not so, under procedural laws such an injunction
vary for each type of income.
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
TAX LAW REVIEWER
Court ruled that the damages that may be caused to the period and for the sane kind character of a tax, then it becomes
taxpayer by being made to pay the taxes cannot be said to be legally objectionable for being oppressive and inequitable.
as irreparable as it would be against the governments inability
to collect taxes. (b) Yes, but it is only in case of indirect duplicate
taxation which is not legally prohibited because the taxes are
---------------------------------------------------------- imposed by different taxing authorities.
(c) The usual methods of avoiding the occurrence

of double taxation are:
12. To provide means for rehabilitation and stabilization of
the sugar industry so as to prepare it for the eventuality of the
1) Allowing reciprocal exemption either by
loss of the quota allocated to the Philippines resulting from the
the law or by treaty;
lifting of U.S. sanctions against an African country. Congress
2) Allowance of tax credit for foreign taxes
passes a law increasing the existing tax on the manufacture of
paid;
sugar on a graduated basis. All collections made under the law
3) Allowance of deduction for foreign
are to accrue to a special fund to be sent only for the purposes
taxes paid;
enumerated therein, among which are to place the sugar
4) Reduction of Philippines tax rate.
industry in a position to maintain itself and ultimately to insure its
continued existence despite the loss of that quota, and to afford
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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 Tax Exemptions
not for a public purpose as the same is being levied exclusively
for the aid and support of the sugar industry. 14. Distinguish a tax amnesty from a tax exemption. (#2a,
2001 Bar Exams)
Decide the case. (#2, 1991 Bar Exams)
Suggested Answer:
Suggested Answer:
Tax Amnesty is an immunity from all criminal, civil
and administrative liabilities arising from non-payment of taxes.
The suit file by the sugar planter questioning the
It is a general pardon given to all taxpayers. It applies only to
constitutionality of the sugar industry stabilization measure is
past tax periods, hence of retroactive application. (People v.
untenable. Taxation is no longer merely for raising revenue in
Castaneda, GR No. L-46881, 1998)
support the existence of government but the power may also be
exercised to carry out legitimate objects of the government. It is
Tax Exemption is an immunity from the civil liability
a legitimate object of government to protect its local industries
only. It is an immunity or privilege, a freedom from a charge or
on which the national economy largely depends. Where the aim
burden to which others are subjected. It is generally prospective
of the tax measure is to achieve such a governmental objective,
in application.
the tax imposition can be said for public purpose (Gaston vs.
Republic Bank, 158 SCRA 626).
----------------------------------------------------------
15. X Corporation was the recipient in 1990 of two tax

---------------------------------------------------------- exemptions both from Congress, one law exempting the
companys bond issues from taxes and the other exempting the
company from the taxes in the operation of its public utilities.
Double Taxation
The law extending the tax exemptions were revoked by the
Congress before their expiry dates.
13. (a) Is a double taxation a valid defense against
the legality of a tax measure?
Were the revocations Constitutional? (#3, 1997 Bar
Exams)
(b) When an item of income is taxed in the
Philippines and the same income is taxed in another
Suggested Answer:
country, is there a case of double taxation?
Yes. The exempting statutes are both granted
(c) What are the usual methods of avoiding the
unilaterally by the Congress in the exercise of taxing powers.
occurrence of double taxation? (#1, 1997 Bar Exams)
Since the taxation is rule and tax exemption, the exception, any
tax exemption, unilaterally granted can be withdrawn at the
Suggested Answer:
pleasure of taxing authority without violating the Constitution.
(Mactan Cebu International Airport v. Marcos, G.R. No. 120082,
(a) No, double taxation standing alone and not
September 11, 1996).
being forbidden by our fundamental law is not a valid defense
against the legality of a tax measure (Pepsi cola v. Tanawan, 69
Neither these were issued by the taxing authority in
SCRA 460). However, if double taxation amounts to a direct
contract lawfully entered by it so that their revocation would not
duplicate taxation, in that the same subject is taxed twice when
constitute an impairment of the obligations of contracts.
it should be taxed but once, in a fashion that both taxes are
imposed fro the same purpose by the same taxing authority,
Alternative Answers:
within the same jurisdiction or taxing district, for same taxable
TAX LAW REVIEWER
No. The withdrawal of tax exemption amounts to a

deprivation of property without due process of law, hence
unconstitutional. Suggested Answer:
Yes. The exemption id 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.
16. 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 an exclusively used for
a) The act of the tax exemption is an act of taxation
religious, charitable and educational purposes. Mercy Hospital
which is inherently legislative. Therefore, a mere executive
is a 100-bed hospital organized for charity patients.
agreement cannot provide for a tax exemption.
Can said hospital claim exemption from taxation under
the above-quoted constitutional provision? Explain. (#8, 1996
b) No. Under the NIRC, for interest on investment in
Bar Exams)
the Philippines is loans to be exempt from taxation, such
investment must have been made by foreign government-owned
Suggested Answer:
or controlled financing institutions or international financing
Yes, Mercy Hospital can claim exemption from
institutions established by governments. In the case at bar, the
taxation under the provision of the Constitution, but only with
loans would be granted by private Japanese financial institutions
respect to real property taxes provided that such real properties
and therefore, the interest thereon would not be exempt from
are used actually, directly and exclusively for charitable
taxation.
purposes.
C) In a loan agreement between the Central Bank of
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the Philippines (as borrower) and private international bank (as
lender), it is stipulated that all payments of interest by the
17. A) Your client, United Market Cooperative, is Central Ban to the lenders shall be made free and clear from all
requesting the Commissioner of Internal revenue to exempt it Philippine taxes which may be imposed thereon.
from the payment of VAT on its purchase of prime commodities
from food suppliers/manufacturers on the ground that it is Is the stipulation valid? Explain.
exempt from all taxes, including VAT, under RA no. 6938, the
Cooperative Code of the Philippines. Suggested Answer:
Do you think your client can obtain the necessary No. The act of tax exemption is an act of taxation
exemption from the BIR? If your answer is in the affirmative, which is inherently legislative and, therefore, a mere executive
explain the basis for the grant. If in the negative, state the basis agreement without concurrence by Congress, cannot provide for
for the rejection of the request. (#5, 1992 Bar Exams) a tax exemption.

1. An exemption is not necessary. The Value Added
Tax is not on the purchase but on the sellers, except in It is valid. The stipulation in the agreement that the
importation. lender shall be made free and clear from all Philippine taxes,
simply meant that the Central Bank will assume the tax liability
2. No. The exemption to which the taxpayers are which is not contrary to law, morals, good customs, public order
entitled to refer to those taxes that are levied on the exempt or public policy.
value added tax is imposed on the sellers of goods and
services, not the purchases. D) Robert Patterson is an American who first arrived
in the Philippines in 1994 as a member of the U.S. Armed
Alternative Answer: Forces that liberated the Philippines. After the war, he returned
to the United States but came back to the Philippines in 1958
Yes, under the NIRC, transactions which are and stayed here up to the present. He is presently employed in
exempted by special laws from the payment of value added the U.S. Naval Base, Olongapo City. For the year 1985, he
taxes shall be so exempt. RA 6938, the Cooperative Code of the earned US$10,856.00. Sometime in 1986, the District Revenue
Philippines is a special law entitling the United Market Office of the Bureau of Internal Revenue served him a notice
Cooperative in the case at bar to exemption from Vat. informing him that he did not file hi s 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
B) The President of the Philippines and the Prime and is therefore not required to file any income tax return.
Minister of Japan entered into an executive agreement in
respect of a loan facility to the Philippines from Japan whereby it Is Pattersons claim correct? (#6, 1991 Bar Exams)
was stipulated that interest on loans granted by private
Japanese financial institutions to private financial institutions in Suggested Answer:
the Philippines shall not be subject to Philippine income taxes.
Pattersons claim is not correct. While Patterson is
Is this exemption valid? Valid. (#11, 1992 Bar Exams) exempt from income tax, an exemption from income tax does
TAX LAW REVIEWER
not, however, necessary mean an exemption likewise from the is compiled with when the tax operates with the same force and
filing of an income tax return (Garrison vs. Court of Appeals, 187 effect in every place where the subject of it is found (Churchill &
SCRA 525). Tait v. Conception, 34 Phil. 969). It does not mean that land,
chattels, securities, income, occupation, franchises, privileges,
---------------------------------------------------------- necessities and luxuries shall be assessed at the same rate.
Different articles may be taxed at different amount provided that
the rate is uniform on the same class everywhere with all people
Limitations
at all times. Accordingly, singling out one particular class for
taxation purposes does not infringe the requirement of
uniformity.
18. Under Art. XIV, Sec. 4(3) of the 1987 Philippine First Alternative Answer:
Constitution, all revenues and assets of non-stock, non-profit
educational institutions, used actually, directly and exclusively The criteria is met when the tax laws operate equally
for educational purposes, are exempt from taxes and duties. and uniformly on all persons under similar circumstances. All
Are income derived from dormitories, canteens and bookstores persons are treated in the same manner, the condition not being
as well as interest income on bank deposits and yields from different, both in privileges conferred and liabilities imposed.
deposit substitutes automatically exempt from taxation? Uniformity in taxation also refers to geographical uniformity.
Explain. (#9, 2000 Bar Exams) Favoritism and preferences is not allowed.
Suggested Answer: Second Alternative Answer:

No. The interest income on bank deposits and yields
from deposit substitutes are not automatically exempt from A tax is deemed to have satisfied uniformity rule when
taxation. There must be a showing that the incomes are it operates with same force and effect in every place where the
included in the schools annual information return and duly subject maybe found (Phil. Trust & Co. v. Yatco, 69 Phil. 420).
audited financial statements together with:
1. Certification from depository banks as to the amount of ----------------------------------------------------------
interest income earned from passive investments not
subject to the 20% final withholding tax; 20. Five years ago, Marquez, Peneyra, Jayme, Posadas
2. Certification of actual, direct, and exclusive utilization of and Manguiat, all lawyers, formed a partnership which they
said income for educational purposes; named Marquez and Peneyra Law Offices. The Commissioner
3. Board resolution on proposed project to be funded out of of Internal Revenue thereafter issued Revenue regulation No. 2-
the money deposited in banks or placed in money market 93 implementing R.A. 7496 known as the Simplified Net Income
placements (Financial Order No. 149-95, November 24, Taxation Scheme (SNITS). Revenue Regulation No. 2-93
1995) which must be used actually, directly and exclusively provides in part:
for educational purposes;
The income derived from dormitories, canteens and Sec. 6. General Professional Partnership. The
bookstores are not also automatically exempt from general professional partnership and the partners are covered
taxation. There is still the requirement for evidence to by R.A. 7496. Thus, in determining profit of the partnership,
show actual, direct and exclusive use for educational only the direct costs mentioned in said law are to be deducted
purposes. It is to be noted that the 1987 Phil. Constitution from partnership income. Also, the expenses paid or incurred
does not distinguish with respect to the source or origin of by partners in their individual capacities in the practice of their
the income. The distinction is with respect to the use which profession which are not reimbursed or paid by the partnership
should be actual, direct and exclusive for educational but are not considered as direct costs are deductible from his
purposes. gross income.
Consequently, the provisions of Sec. 30 of the NIRC of 1.) Marquez and Peneyra Law Offices filed a
1997, that a non-stock and nonprofit educational institution taxpayers suit alleging that Revenue Regulation No. 2-93
is exempt from taxation only in respect to income received violates the principle of uniformity in taxation because general
by them as such could not affect the constitutional tax professional partnerships are now subject to payment of income
exemption. Where the Constitution does not distinguish tax and that there is a difference in the tax treatment between
with respect to source or origin, the Tax Code should not individuals engaged in the practice of their respective
make distinctions. professions and partners in general professional partnerships.
Is this contention correct? Explain.
2.) Is Revenue Regulation No. 2-93 now
---------------------------------------------------------- considered as having adopted a gross income method instead
of retaining the net income taxation scheme? Explain. (#7, 1995
19. Explain the requirement of uniformity as a limitation in Bar Exams)
the imposition and /or collection of taxes. (#1, 1998 Bar Exams)
Suggested Answer:
Suggested Answer:
1.) The contention is not correct. General
Uniformity in the imposition and /or collection of taxes professional partnerships remain to be a non-taxable entity.
that all taxable articles, or in kinds of property of the same class What is taxable are the partners comprising the same and they
shall be taxed at the same rate. The requirements of uniformity are obligated to report as income their share in the income of
the general professional partnership during the taxable year
TAX LAW REVIEWER
whether distributed or not. The SNITS treat professionals as nights at the Folk Arts Theater. Binatra was paid P200,000.00 a
one class of taxpayer so that they shall be treated alike night. The Parishes earned of P1,000,000.00 which they used
irrespective of whether they practice their profession alone or in for the support of the orphans in the city.
association with other professionals under a general
professional partnership. What are taxed differently are Are the four Catholic Parishes liable to pay taxes?
individuals and corporations. All individuals similarly situated
are taxed alike under the regulations, therefore, the principle of Suggested Answer:
uniformity in taxation is not violated. Or the contrary, all the
requirements of a valid classification have been compiled with Yes. The four Catholic parishes are liable because the
(Tan vs. del Rosario et. al, G.R. No. 109289, October 3,1994). income received by them, not being income earned as such in
the performance of their religious functions and duties, is
2.) No. Revenue Regulation No. 2-93 taxable income under the last paragraph of Sec 26, in relation to
implementing RA No. 7496 have indeed significantly reduced Sec. 26(e) of the Tax Code. In promoting and operating the
the items of deduction y limiting it to direct costs and expenses Binatra Show, they engaged in an activity conducted for profit.
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
Enforcement
might be allowed, this can well be justified by the fact that
deductions are not matters of right but are matters of legislative
grace.
23. 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
21. The University of Bigaa, a non-stock, non-profit entity, letter to a bank (CX Bank) to furnish the BIR on deposits of
operates a canteen for its students and a bookstore inside the some suppliers of A Co. on the alleged ground that the suppliers
campus. It also operates two dormitories for its students, one of are committing tax evasion.
which is in the campus.
A Co., X Bank and the suppliers have not been issued
by the BIR letter of authority to examine. A Co. and X Bank
Is the University liable to pay income taxes for the
believe that the BIR is on a fishing exhibition and come to you
operation of the:
for counsel. What is your advice? (#6, 1999 Bar Exams)
1) canteen?
Suggested Answer:
2) bookstore?
I will advise A Co. and B Co. that the BIR is justified
3) Two dormitories? (# 9, 1994 Bar Exams)
only in getting information from the former but not from the latter.
The BIR is authorized to obtain information from other persons
Suggested Answer:
other than those whose internal revenue tax liability is subject to
audit or investigation. However, this power shall not be
1) For the operation of the canteen inside the campus,
construed as granting the Commissioner the authority to inquire
the income thereon being incidental to the operations of the
into bank deposits. (Sec. 5, NIRC)
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, 24. Mr. Pascuals income from leasing his property
since this is an ancillary activity the conduct of which is carried reaches the maximum rate of tax under the law. He donated
out within the school premises. one-half of his said property to a non-stock, non-profit
educational institution whose income and assets are actually,
3) The University of Bigaa shall not be liable to pay directly and exclusively used for educational purposes, and
income taxes fort the operation of the dormitory located in the therefore qualified for tax exemption under Art. XIV, Sec. 4(3) of
campus for the same reasons as the foregoing. the Constitution and Sec. 30 (h) of the Tax Code. Having thus
transferred a portion of his said asset, Mr. Pascual succeeded in
However, the latter shall be liable for income taxes on paying a lesser tax on the rental income derived from his
income from operations of the dormitory located outside the property . Is there tax avoidance or tax evasion? Explain. (# 2a,
school premises. 2000 Bar Exams)
----------------------------------------------------------
----------------------------------------------------------
22. Four Catholic parishes hired the services of Frank

Binatra, a foreign non-resident entertainer, to perform for four (4)
TAX LAW REVIEWER
25. A taxpayer is suspected not to have declared his

correct gross income in his return filed for 1997. The examiner Suggested Answer:
requested the Commissioner to authorize him to inquire into the
bank deposits of the taxpayer so that he could proceed with the The Commissioner of Internal Revenue is authorized
net worth method of investigation to establish fraud. May the to inquire into the bank deposits of:
examiner be allowed to look into the taxpayers bank deposits? 1. A decedent to determine his gross estate;
In what cases may the Commissioner or his duly authorized
representative be allowed to inquire or look into the bank 2. Any taxpayer who has filed an application for
deposits of a taxpayer? (#17, 2000 Bar Exams) compromise of his tax liability by means of financial incapacity to
pay his tax liability (Sec. 6(F), NIRC).
Suggested Answer:
No, as this would be violative of RA NO. 1405, the The limited power of the Commissioner does not
Bank Deposit Secrecy Law. The CIR or his duly authorized conflict with RA No. 1405 because the provisions of the Tax
representative may be allowed to inquire or look into the bank Code granting this power is an exception to the Secrecy of Bank
deposit of a taxpayer in the following cases: Deposits Law as embodied in a latter legislation.
a. For purposes of determining the gross estate of a
decedent; Furthermore, in case a taxpayer applies for an
b. Where the taxpayer has filed an application for application to compromise the payment of his tax liabilities on
compromise of his tax liability by reason of financial his claim that his financial position demonstrate a clear inability
incapacity to pay such tax liability (Sec. 6F NIRC of 1997) to pay the tax assessed, his application shall not be considered
c. Where the taxpayer has signed a waiver authorizing the unless and until he waives in writing his privileges under RA No.
CIR or his duly authorized representative to inquire into the 1405, and such waiver shall constitute authority of eth
bank deposits. Commissioner to inquire into the bank deposits of the taxpayer.
----------------------------------------------------------
---------------------------------------------------------- 28. (1) When is a revenue tax considered
delinquent?
(2) What constitutes prima facie evidence of
26. The house of Representative introduced HB 2000 false or fraudulent return? (#17, 1998 Bar Exams)
which envision to levy a tax on various transactions. After the bill
was approved by the House, the bill was sent to the Senate as Suggested Answer:
so required by the Constitution. In the upper House, instead of a
deliberation on the House Bill, the Senate introduces SB 8000 1. A revenue tax is considered delinquent
which was its own version of the same tax. The Senate when it is unpaid after the lapse of the last day prescribed by
deliberated on this Senate Bill and approved the same. The law for its payment. Likewise, it could also be considered as
House Bill and Senate Bill then consolidated in the Bicameral delinquent where an assessment fro delinquency tax has
Committee. Eventually, the consolidated Bill was approve and become final and the taxpayer has not paid it within the period
sent to the President who signed the same. The private sectors given in the notice of assessment.
affected by the new law questioned the validity of the enactment
on the ground that the Constitutional provision requiring that all 2. There is prima facie evidence of false or
revenue bills should originate from the House of fraudulent return when the taxpayer has willfully and knowingly
Representatives have been violated. filed it with the intent to evade a part or all of the tax legally due
from him (Ungab v. Cusl, 97 SCRA 877). There must appear a
Resolve the issue. (#2, 1997 Bar Exams) design to mislead or deceive on the part of the taxpayer, or at
least culpable negligence. A mistake, not culpable in respect of
Suggested Answer: its value would not constitute a false return. (Words and
Phrases, Vol. 16, page 173)
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 29. 1) Distinguish tax evasion from tax avoidance.
House. But once the revenue bill was pass its own version on
the same subject matter consonant with the latters power to 2) X is the owner of a residential lot situated at Quirino
propose or concur with amendments. This follows from the co Avenue, Pasay City. The lot has an area of 300 square maters.
equality of the two chambers of Congress. (Tolentino v. On June 1, 1994, 100 square meters of said lot owned by X was
Secretary of Finance, GR No. 115455, Oct. 30, 1995) 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 P150,000.00. X claims his income tax liability as already
27. Can the Commissioner of the Internal Revenue inquire been compensated by the amount of P300,000.00 which the
into bank deposits of a taxpayer? If so, does this power of the government owes in for the expropriation of his property.
Commissioner conflict with RA 1450 (Secrecy of Bank Deposit Decide. (#3, 1996 Bar Exams)
Law). (#7, 1998 Bar Exams)
TAX LAW REVIEWER
Suggested Answer: All criminals violations except those involving fraud,

1) Tax evasion is a scheme used outside of can be compromised by the Commissioner but only prior the
those lawful means to escape tax liability and, when availed of, filing of the information with the Court.
it usually subjects the taxpayer to further or additional civil or The Commissioner may also abate or cancel a tax
criminal liabilities. Tax avoidance, on the other hand, is a tax liability when (a) the tax or any portion thereof appears to have
saving device within the means sanctioned by law, hence legal. been unjustly or excessively assessed: or (b) the administrative
and collection costs involved do not justify collection of the
amount due, (Sec. 204, NIRC).
2) 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.
31. Businessman Stephen Yang filed an income tax return
Taxes and debts cannot be the subject of compensation
for 1993 showing business net income of P350,000.00 on which
because the Government and X are not mutually creditors and
he paid an income tax of P61,000.00. after filing the return he
debtors of each other and a claim for taxes is not a debt,
realized that he forgot to include an item of business income in
demand, contract, or judgment as is allowable to be set off.
1993 for P50,000.00. Being an honest taxpayer, he included
(Francia vs. IAC, G.R. 76749,June 28,1988)
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 subcharge.
30. 1) Distinguish a false return from a fraudulent
return. 1.) Is the examiner correct? Explain.
2) Explain the extent of the authority of the 2.) If you were the lawyer of Stephen Yang, what
Commissioner of Internal Revenue to compromise would you have advised your client before he
and abate taxes? (#7, 1996 Bar Exams) included in his 1994 return the amount of
P50,000.00 as 1993 income to avoid the fraud
Suggested Answer: subcharge? Explain.
3.) Considering that Stephen Yang had already
1) The distinction between a false return and a beeen assessed a deficiency income tax for
fraudulent return is that the first merely implies a deviation from 1993 for his failure to report the P50,000.00
the truth or fact whether international or not, whereas the income, what would you advise him to do to
second is intentional and deceitful with the sole aim of evading avoid the penalties for tax delinquency?
the correct tax due (Aznar vs. Commissioner, L-20569, August Explain.
23,1974). 4.) What would you advise Stephen Yang to do with
regard to the income tax he paid for the
Alternative Answer: P50,000.00 in his 1994 return? In case your
remedy fails, what is your other recourse?
1) A false return contains deviations from the Explain. (#13, 1995 Bar Exams)
truth, which may be due to mistakes, carelessness or ignorance
of the person preparing the return. A fraudulent return contains Suggested Answer:
an intentional wrong doing with the sole object of avoiding the
tax and it may consist in the intentional underdeclaration of 2.) The examiner is correct in assessing a
income, intentional overdeclaration of deduction or recurrence of deficiency income tax for taxable year 1993 but not in imposing
both. A false return is not necessarily tainted with fraud because the 50% fraud subcharge. The amount of all items of gross
the fraud contemplated by law is actual and not constructive. income must be included in gross income during the year in
Any deviation from the truth on the other hand, whether which received or realized (Sec.38, NIRC). The 50% fraud
intentional or not constitutes falsity, (Aznar vs. Commissioner, L- subcharge attaches only if a false or fraudulent return is willfully
20569, August 23, 1974) made by Mr. Yang (Sec. 248, NIRC). The fact that Mr. Yang
included the income in his 1994 return belies any claim of
2) The authority of the Commissioner to willfulness but is rather indicative of an honest mistake which
compromise encompasses both civil and criminal liabilities of was sought to be rectified by a subsequent act, that is the filing
the taxpayer. The civil compromise is allowed only in cases (a) of the 1994 return.
where the tax assessment is a doubtful validity, or (b) when the
financial position of the taxpayer demonstrates a clear inability 3.) Mr. Yang should have amended his 1993 income
to pay the tax. The compromise of the tax liability is possible at tax return to allow for the inclusion of the P50,000.00 income
any stage of litigation and the amount of compromise is left to during the taxable period it was realized.
the discretion of the Commissioner except with respect to
financial assessments issued against large taxpayers wherein
the Commissioner cannot compromise for less than fifty percent 4.) Mr. Yang should file a protest questioning the
(50%). Any compromise involving large taxpayers lower than 50% subcharge and ask for the abatement thereof.
fifty percent (50%) shall be subject to the approval of the
Secretary of Finance. Alternative Answer:
TAX LAW REVIEWER
Mr. Yang should pay the deficiency income tax on or

before the day prescribed for its payment per notice of demand. Is the Revenue Regulation valid? (#16, 1994 Bar
After payment and within two years thereafter, he should file a Exams)
claim for refund of taxes erroneously paid to recover the
excessive subcharge imposed. Suggested Answer:
5.) Mr. Yang should file a written claim for refund The regulation establishing gross income as the tax base for
with the Commissioner of Internal Revenue of the taxes paid on corporations doing business in the Philippines (domestic as well
the P50,000.00 income included in 1994 within two years from as resident foreign) is not valid. This is no longer implementation
payment pursuant to section 204(3) of the Tax Code. Should of the law but actually it constitutes legislation because among
this remedy fail in the administrative level, a judicial claim for the powers that are exclusively within the legislative authority to
refund can be instituted before the expiration of the two year tax is the power to determine the amount of the tax. (Sec. 1
period. 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.
32. 1) What is a deficiency interest for purposes
----------------------------------------------------------
of the income tax? Illustrate.
2) What is a delinquency interest for
purposes of the income tax? Illustrate. (#14, 1995 Bar
Exams) 34. 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
Suggested Answer: facts of tax cases and issue assessments/demands against a
taxpayer for deficiency taxes.
1.) Deficiency interest for purposes of the income tax is
the interest due on any amount of tax due or installment thereof 1. If an RTC judge, on motion of an informer, renders
which is not paid on or before the date prescribed for its a decision ordering the Commissioner to assess and collect
payment computed at the rate of 20% per annum or the Manila from the taxpayer certain deficiency taxes when, in fact the BIR
Reference Rate, whichever is higher, from the date prescribed has already ascertained that no deficiency taxes are due the
for its payment until it is fully paid. If for example after the audit taxpayer, what proper course of action would you advise your
of the books of XYZ Corp. for taxable year 1993 there was informer-client to undertake? (#4, 1992 Bar Exams)
found to be due a deficiency income tax of P125,000.00
inclusive of the 25% subcharge imposed under Section 248 of Suggested Answer:
the Tax Code, the interest will be computed on the P125,000.00
from April 15, 1994 up to its date of payment. The issue being disputed assessment, jurisdiction, if
at all, lies with the Court of Tax Appeals and not with the RTC.
2.) Delinquency interest is the interest of 20% or the The court decision, in my view, can not be voided. I would
Manila Reference Rate, whichever is higher, required to be paid simply advice my client to pursue the matter administratively. If
in case of failure to pay: the evidence warrants, I could have the matter investigated by
a.) the amount of the tax due on any the Ombudsman.
return required to be filed: or
b.) the amount of the tax due for which Alternative Answer:
return is required: or
c.) the deficiency tax or any subcharge or I will advice the client to go to the BIR to file an
interest thereon, on the due date appearing information under oath so that it may consider any evidence
in the notice and demand of the may client may have in hid possession.
Commissioner of Internal Revenue.
2. Do you think an action for mandamus with the RTC
If in the above illustration the assessment notice was can prosper to compel the Commissioner to issue a deficiency
released on December 31,1994 and the amount of assessment?
deficiency tax, inclusive of subcharge and deficiency
interest were computed up to January 30,1995 which is the
due date for payment per assessment notice; failure to apy Suggested Answer:
on this latter date will render the tax delinquent and will
require the payment of delinquency interest. 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.
----------------------------------------------------------
3. Which court acts on:
33. The Secretary of Finance, upon recommendation of a. Disputed assessments
the Commissioner of Internal Revenue, issued a Revenue b. Tax collection cases filed by the BIR?
Regulation using gross income as the tax base for corporations
doing business in the Philippines. Suggested Answer:
TAX LAW REVIEWER
A Co., the withholding agent of the non-resident

a. The CTA exercises exclusive appellate jurisdiction foreign corporation is entitled to claim the refund of excess
over disputed assessments? withholding tax paid on the income of said corporation in the
b. Tax collection cases filed by the BIT with regular Philippines. Being a withholding agent, it is the one held liable
Courts. 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.
April 15, 1988, 160 SCRA 573; CIR v. Proctor & Gamble PMC,
204 SCRA 377).
NATIONAL TAXATION ----------------------------------------------------------
A. Income Taxation
37. HK Co. is a Hong Kong corporation not doing
35. A Co., a Philippine corporation, has an executive (P) business in the Philippines. It holds 40% of the shares of A
who is a Filipino citizen. A Co. has a subsidiary in Hong Co., a Philippine company, while the 60% is owned by P
Kong (HK Co.) and will assign P for an indefinite period to Co., a Filipino owned Philippine corporation. HK Co. also
work full time for HK Co. P will bring his family to reside in owns 100% of the shares of B Co., an Indonesian company
Hong Kong and will lease out his residence in the which has a duly licensed Philippine branch. Due to
Philippines. The salary of P will be shouldered 50% by A worldwide restructuring of the HK Co. group, HK Co.
Co. while the other 50% plus housing, cost of living and decided to sell all its shares in A and B Cos. The
educational allowances of Ps dependents will be negotiations for the buy-out and the signing of the
shouldered by HK Co. A Co. will credit the 50% of Ps Agreement of Sale were all done in the Philippines. The
salary to Ps Philippine bank account. P will sign the Agreement provides that the purchase price will be paid to
contract of employment in the Philippines. P will also be HK Co.s bank account in the US and that title to A and B
receiving rental income for the lease of his Philippine Cos. Shares will pass from HK Co. to P Co. in Hong Kong
residence. Are these salaries, allowances and rentals where the stock certificates will be delivered. P Co. seeks
subject to the Philippine income tax? (#11, 1999 Bar your advice as to whether or not it will subject the
Exams) payments of purchase price to WT. Explain your advice.
(#7, 1999 Bar Exams)
Suggested Answer:
Suggested Answer:
P Co. should not subject the payments of the
The salaries and allowances received by P are not
purchase price to withholding tax. While the seller is a non-
subject to Philippine income tax. P qualifies as a non-resident
resident foreign corporation which is not normally required to file
citizen because he leaves the Philippines for employment
returns in the Philippines, therefore, ordinarily all its income
requiring him to be physically present abroad most of the time
earned from Philippine sources is taxes via the withholding tax
during the taxable year (Sec. 22E), NIRC). A non-resident
system, this is not the procedure availing with respect to sale of
citizen is taxable only on income derived from Philippine
shares of stock. The capital gains tax on the sale of shares of
sources (Sec. 23 NIRC). The salaries and allowances from
stock of a domestic corporation is always required to be paid
being employed abroad are incomes from without because
through a capital gains tax return filed. The sale of the shares of
these are compensation for services rendered outside the
stock of the Indonesian Corporation is not subject to income tax
Philippines (Sec. 42, NIRC).
under our jurisdiction because the income derived therefrom is
However, P is taxable on rental income for the lease
considered as a foreign-sourced income.
of his Philippine residence because this is an income derived
from within, the leased property being located in the Philippines
Alternative Answer:
(Sec. 42, NIRC).
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 Sec. 28B (5c) is collectible via the withholding of
tax at source pursuant to Sec. 57 of the same Code.
36. A Co. is the wholly owned subsidiary of B Co., a
nonresident German company. A Co. has a trademark ----------------------------------------------------------
licensing agreement with B Co. On February 10, 1995, A
Co. remitted to B Co. royalties of P10,000, which A Co. 38. A died, survived by his wife and three children. The
subjected to a WT of 25% or P2,500. Upon advice of estate tax was properly paid and the estate settled and
counsel, A Co. realized that the proper WT rate is 10%. On divided and distributed among the four heirs. Later, the
March 20, 1996, A Co. filed a claim for refund of P2,500 BIR found out that the estate failed to report the income
with the BIR. The BIR denied the claim on November 15, received by the estate during administration. The BIR
1996. On November 28, 1996, A Co. filed a petition for issued a deficiency income tax assessment plus interest,
review with the CTA. The BIR attacked the capacity of A surcharges and penalties. Since the 3 children are residing
Co., as agent to bring the refund case. Decide the issue. abroad, the BIR sought to collect the full tax deficiency only
(#8, 1999 Bar Exams) against the widow. Is the BIR correct? (#4a, 1999 Bar
Exams)
Suggested Answer:
TAX LAW REVIEWER
Suggested Answer: Depreciation of goodwill is allowed as a deduction

Yes, the BIR is correct. In a case where the estate from gross income if the goodwill is acquired through capital
has been distributed to the heirs, the collection remedies outlay and is known from experience to be of value to the
available to the BIR in collecting tax liabilities of an estate may business for only a limited period (Sec. 107, Revenue
either (1) sue all the heirs and collect from each of them the Regulations No. 2). In such case, the goodwill is allowed to be
amount of tax proportionate to the inheritance received or (2) by amortized over its useful life to allow the deduction of the current
virtue of the lien created under Sec. 219, sue only one heir and portion of the expense from gross income, thereby paving the
subject the property he received from the estate to the payment way for a proper matching of costs against revenues which is an
of the estate tax. The BIR therefore, is correct in pursuing the essential feature of the income tax system.
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. 41. Explain if the following items are deductible from gross
income for income tax purposes. Disregard who is the
person claiming the deduction. 1 Reserves for bad debts.
----------------------------------------------------------
2 Worthless securities. (#13, 1999 Bar Exams)
39. HK Co. is a Hong Kong company, which has a duly

Suggested Answer:
licensed Philippine branch, engaged in trading activities in
1. Reserve for bad debts are not allowed as deduction from
the Philippines. HK Co. also invested directly in 40% of
gross income. Bad debts must be charged off during the
shares of stock of A Co., a Philippine corporation. These
taxable year to be allowed as deduction from gross income.
shares are booked in the Head Office of HK Co. and are
The mere setting up of reserves will not give rise to any
not reflected as assets of the Philippine branch. In 1998, A
deduction. (Sec. 34E NIRC).
Co. declared dividends to its shareholders. Before
2. Worthless securities, which are ordinarily assets, are not
remitting the dividends to HK Co., A Co, seeks your advice
allowed as deduction from gross income because the loss is not
as to whether it will subject the remittance to WT. No need
realized. However, if these worthless securities are capital
to discuss WT rates, if applicable. Focus your discussion
assets, the owner is considered to have incurred a capital loss
on what is the issue. (#9, 1999 Bar Exams)
as of the last day of the taxable year and therefore, deductible to
the extent of capital gains. (Sec. 34 D (4) NIRC). This
deduction however, is not allowed to a bank or trust company
Suggested Answer:
(Sec. 34 E (2) NIRC).
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
42. A Co., a Philippine corporation issued shares of stocks
transacts business in the Philippines directly and independently
with the following features:
of its branch, the taxpayer would be the foreign corporation itself
and subject to the dividend tax similarity imposed on non- 1. Non-voting
resident foreign corporation. The dividends attributable to the 2. Preferred and cumulative dividends at the rate of 10% per
Home Office would not qualify as dividends earned by a resident annum, whether or not in any period the amount is covered
foreign corporation, which is exempt from tax. (Marubeni Corp. by earnings or projects;
v. Commissioner, September 14, 1989) 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
40. Explain if the following items are deductible from gross
4. The issuer has the option to redeem the preferred stock.
income tax purposes. Disregard who is the person
claiming the expense. 1 Interest on loans used to acquire
capital equipment or machinery. 2 Depreciation of A Co. declared dividends on the preferred stock and
goodwill. (#12, 1999 Bar Exams) claimed the dividends as interest deductible from its gross
income for income tax purposes. The BIR disallowed the
deduction. A Co. maintains that the preferred shares with
Suggested Answer: their features are really debt and therefore the dividends
1. This is a deductible item from gross income. The law gives are really interests. Decide. (#14, 1999 Bar Exams)
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 profession. (Sec. 34B (3) NIRC) Suggested Answer:
2. Depreciation for goodwill is not allowed as deduction from The dividends are not deductible from gross income.
gross income. While intangible maybe allowed to be Preferred shares shall be considered capital regardless of the
depreciated or amortized, it is only allowed to those intangibles conditions under which such shares are issued and therefore,
whose use in the business or trade is definitely limited in dividends paid thereon are not considered interest which are
duration. (Basilan Estates, Inc. v. CIR 21 SCRA 17) Such is not allowed to be deducted from the gross income of the corporation
the case with goodwill. (Revenue Regulation No. 17-71, July 12, 1971).
Alternative Answer: ----------------------------------------------------------

TAX LAW REVIEWER
44. What is meant by Taxable Income? (#10a, 2000 Bar

Exams)
43. A Co., a Philippine corporation has two divisions

manufacturing and construction. Due to the economic Suggested Answer:
situation, it had to close its construction division and lay-off Taxable Income means the pertinent items of gross
the employees in that division. A Co. has a retirement plan income specified in the Tax Code, less the deductions and/or
approved by the BIR, which requires a minimum of 50 personal and additional exemptions, if any, authorized for such
years of age and 10 years of service in the same employer types of income by the Tax Code or other special laws. (Sec. 31
at the time of retirement. NIRC of 1997)
There are two groups of employees to be laid out:

----------------------------------------------------------
a. Employees who are at least 50 years of age and has at
least 10 years of service at the time of termination of
employment.
45. Jose Miranda, a young artist and designer, received a
b. Employees who do not meet either the age or length of
prize of P100,000 for winning in the on-the-spot peace
service A Co. plans to give the following:
poster contest sponsored by a local Lions Club. Shall the
1. For category (A) employees the benefits under the
reward be included in the gross income of the recipient for
BIR approved plan plus an ex gratia payment of the
tax purposes? Explain. (#10b, 2000 Bar Exams)
month of every year of service.
2. For category (B) employees one month for every
year of service.
Suggested Answer:
3. For both categories, the cash equivalent of unused
No. It is not includible in the gross income of the
vacation and sick leave credits.
recipient because the same is subject to a final tax of 20% the
amount thereof being in excess of P10,000 (Sec. 24B(1), NIRC
A Co. seeks your advice as to whether or not it will subject of 1997). The prize constitutes a taxable income because it was
any of these payments to WT. Explain your advice. (#10, made primarily in recognition of artistic achievement which he
1999 Bar Exams) won due to an action on his part to enter the contest. (Sec. 32B
(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
Suggested Answer: prize or award.
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 46. Mr. Cortez is a non-resident alien based in Hong
gross income. The ex gratia payment also qualifies as an Kong. During the calendar year 1999, he came to the
exclusion from gross income being in the nature of benefit Philippines several times and stayed in the country for an
received on account of separation due to causes beyond the aggregated period of more than 180 days. How will Mr.
employees control (Sec. 33B NIRC). The cash equivalent of Cortez be taxed on his income derived from sources within
unused vacation and sick leave credits qualifies as part of the Philippines and from abroad? (#8, 2000 Bar Exams)
separation benefits excluded from gross income (CIR v. CA
October 17, 1991)
Suggested Answer:
For category B employees, all the benefits received by Mr. Cortez being a non-resident alien individual who
them will also be exempt from income tax, hence not subject to has stayed for an aggregated period of more than 180 days
withholding tax. These are benefits received on account of during the calendar year 1999, shall for that taxable year be
separation due to causes beyond the employees control, which deemed to be a non-resident alien doing business in the
are specifically excluded from gross income. (Sec. 32B NIRC) Philippines.
He shall be subject to an income tax in the same
Alternative Answer: manner as an individual citizen and a resident alien individual,
All of the payments are not subject to income tax and on taxable income received from all sources within the
should not also be subject to WT. The employees were laid off, Philippines. (Sec. 25 (A1) NIRC of 1997)
hence, separated for a cause beyond their control. Thus, he is allowed to avail of the itemized deductions
Consequently, the amounts to be paid by reason of such including the personal and additional exemptions but subject to
involuntary separation are excluded from gross income, the rule on reciprocity on the personal exemptions (Sec. 34 A to
irrespective of whether the employee at the time of separation J and M in relation to Sec. 25 A1 and Sec. 35 (D) of the same
has rendered less then ten years of service and/or is below fifty Code)
years of age. (Sec. 32B NIRC)
---------------------------------------------------------- ----------------------------------------------------------
TAX LAW REVIEWER
47. To start a business of his own, Mr. Mario de Guzman required anymore to file an income tax return (Sec. 51A (2c)
opted for an early retirement from a private company after NIRC of 1997)
ten years of service. Pursuant to the companys qualified
and 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. Under what conditions are retirement benefits 49. Last July 12, 2000, Mr. and Mrs. Peter Camacho sold
received from gross income and exempt from taxation? their principal residence situated in Tandang Sora, Quezon
(#6, 2000 Bar Exams) City for Ten Million Pesos 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
Suggested Answer: in order that the capital gains presumed to have been
a) It depends. An employee retiring under a realized from such sale may not be subject to capital gains
companys qualified and private retirement plan can only be tax? (#13, 2000 Bar Exams)
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 year; Suggested Answer:
2. That he is not less than 50 years of age at the time of The conditions are:
retirement and 3. The benefit is availed of only once. 1. The proceeds are fully utilized in acquiring or constructing
In the instant case, there is no mention whether the a new principal residence within 18 calendar months from
employee has likewise complied with requisites number 2 the sale or disposition of the principal residence or 18
and 3. 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
b) The conditions to be met in order that retirement
residence built or acquired.
benefits received by officials and employees of private firms are
3. The CIR must have been informed by Mr. & Mrs. Peter
excluded from gross income and exempt from taxation are as
Camacho within thirty (30) days from the date of sale or
follows:
disposition on July 12, 2000 through a prescribed return of
1. Under RA No. 4917 (those received under a reasonable
their intention to avail of the tax exemption.
private benefit plan):
4. That the said exemption can only be availed of once every
a. The retiring official or employee must have been in
ten (10) years.
service of the same employer for at least ten years.
5. If there is no full utilization of the proceeds of sale or
b. That he is not less than fifty years of age at the time of
disposition, the portion of the gain presumed to have been
retirement; and
realized from the sale or disposition shall be subject to
c. That the benefit is availed of only once.
capital gains tax (Sec. 24 D2, NIRC of 1997)
2. Under RA No. 7641 (those received from employers
----------------------------------------------------------
without any retirement plan):
a. Those received under existing collective bargaining
agreement and other agreements are exempt; and
50. In order to facilitate the processing of its application
b. In the absence of retirement plan or agreement
for a license from a government office Corporation A found
providing for retirement benefits the benefits are
it necessary to pay the amount of P100,000 as a bribe to
excluded from gross income and exempt from income
the approving official. Is the P 100,000 deductible from the
tax if:
gross income of Corporation A? On the other hand, is the
i. Retiring employee must have served at least
P 100,000 taxable income of the approving official?
five years; and
Explain your answer. (#12, 2001 Bar Exams)
ii. That he is not less than sixty years of age
but not more than sixty five.
Suggested Answer:
---------------------------------------------------------- Since the said amount constitutes a bribe, it is not
allowed as a deduction from gross income of Corporation
48. Mr. Javier is a non-resident senior citizen. He A. (Sec. 34A(1c) NIRC). However, to the recipient
receives a monthly pension from the GSIS, which he government official, the same constitutes a taxable income.
deposits with the PNB-Makati Branch. Is he exempt from All income from legal or illegal sources are taxable absent
income tax and therefore not required to file an income tax any clear provision of law exempting the same. This is the
return? (#7, 2000 Bar Exams) reason why gross income had been defined to include
income from whatever source derived. (Sec. 32A NIRC).
Illegally acquired income constitutes realized income under
the claim of right doctrine (Rutkin v. US, 343 US 130)
Suggested Answer:
Mr. Javier is exempt from income tax on his monthly
GSIS Pension (Sec. 32B (6f) 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. Javiers sole taxable income
would have been subjected to a final withholding tax, he is not
TAX LAW REVIEWER
51. Distinguish Allowable Deductions from Personal does not come within the definition of income. (Sec. 61, RR
Exemptions. Give an example of an allowable deduction No. 2)
and another example for personal exemption. (#10, 2001
Bar Exams)
Deductions from gross income, on the other hand, are
the amounts, which the law allows to be deducted from
Suggested Answer: gross income in order to arrive at net income.
The distinctions are as follows:
a. As to amount Allowable Deductions generally Exclusions pertain to the computation of gross
refer to actual expenses incurred in the pursuit of trade, income, while deductions pertain to the computation of net
business or practice of profession while personal exemptions income.
are arbitrary amounts allowed by law.
Exclusions are something received or earned by the

b. As to nature Allowable Deductions constitute
taxpayer which do not form part of gross income while
business expenses while personal exemptions pertain to
deductions are something spent or paid in earning gross
personal expenses.
income.
c. As to purpose Deductions are allowed to

enable the taxpayer to recoup his cost of doing business while Example of an exclusion from gross income is
personal exemptions are allowed to cover personal family and proceeds of life insurance received by the beneficiary upon
living expenses. the death of the insured which is not an income or 13 th
month pay of an employee not exceeding P30,000 which is
an income not recognized for tax purposes. Example of a
d. As to claimants Allowable Deductions can be
deduction is business rental.
claimed by all taxpayers, corporate or otherwise, while personal
exemptions can be claimed only by individual taxpayers.
----------------------------------------------------------
----------------------------------------------------------
52. Taxpayers whose only income consists of salaries and

54. What do you think is the reason why cash dividends,
wages from their employers have long been complaining
when received by a resident citizen or alien from a
that they are not allowed to deduct any item from their
domestic corporation, are taxed only at the final tax of 10%
gross income for purposes of computing their net taxable
and not at the progressive tax rate schedule under Sec.
income. With the passage of the Comprehensive Tax
24(A) of the Tax Code? Explain your answer. (#7, 2001
Reform Act of 1987, is this complaint valid? Explain your
Bar Exams)
answer? (#5, 2001 Bar Exams)
Suggested Answer:
Suggested Answer:
The reason for imposing final withholding tax rather
No more. Gross compensation income earners are
than the progressive tax schedule on cash dividends
now allowed at least an item of deduction in the form of
received by a resident citizen or alien from a domestic
premium payments on health and/or hospitalization
corporation, is to ensure the collection of income tax on
insurance in an amount not exceeding P2,400 per annum
said income. If we subject the dividend to the progressive
(sec. 34M). This deduction is allowed if the aggregate
tax rate, which can only be done through the filing of
family income do not exceed P250,000 and by the spouse,
income tax returns, there is not assurance that the
in case of married individual, who claims additional
taxpayer will declare the income, especially when there are
personal exemption for dependents.
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
53. Distinguish Exclusion from Gross Income from
number of income recipients.
Deductions from Gross Income. Give an example of
each. (#6b, 2001 Bar Exams)
Likewise, the imposition of a final withholding tax will
make the tax available to the government at an earlier time.
Suggested Answer:
Finally, the final withholding tax will be a sure revenue to
Exclusions from gross income refer to a flow of wealth the government unlike when the dividend is treated as a
to the taxpayer which are not treated as part of gross returnable income where the recipient thereof who is in a
income, for purposes of computing the taxpayers taxable tax loss position is given the chance to offset such loss
income, due to the following reasons: 1. It is exempted by against dividend income thereby depriving the government
the fundamental law, 2. It is exempted by statute, and 3. It of the tax on said dividend income.
TAX LAW REVIEWER
----------------------------------------------------------
----------------------------------------------------------
58. What is the rationale of the law in imposing what is
known as the Minimum Corporate Income Tax on Domestic
55. What is meant by income subject to final tax? Give
Corporations? (#9a, 2001 Bar Exams)
at least two examples of income of resident individuals that
is subject to the final tax? (#6a, 2001 Bar Exams)
Suggested Answer:
Suggested Answer: The imposition of the MCIT is designed to forestall the
prevailing practice of corporations of over claiming
Income subject to final tax refers to an income
deductions in order to reduce their income tax payments.
wherein the tax due is fully collected through the
The filing of income tax returns showing a tax loss every
withholding tax system. Under this procedure, the payor of
year goes against the business motive which impelled the
the income withholds the tax and remits it to the
stockholders to form the corporation. This is the reason
government as a final settlement of the income tax due on
why domestic corporations (and resident foreign
said income. The recipient is no longer required to include
corporations) after the recovery period of four years from
the item of income subjected to final tax as part of his
the time they commence business operations, they
gross income in his income in his income tax returns.
become liable to the MCIT whenever this tax imposed at
Examples of income subject to final tax are dividend
2% of gross income exceeds the normal corporate income
income, interest from bank deposits, royalties, etc.
tax imposed on net income.
----------------------------------------------------------
----------------------------------------------------------
56. X was hired by Y to watch over Ys fishponds with a

59. Is a corporation which is exempted from the MCIT
salary of P 10,000. To enable him to perform his duties
automatically exempted from the regular corporate income
well, he was also provided a small hut, which he could use
tax? Explain your answer. (#9b, 2001 Bar Exams)
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 Sec. 33
Suggested Answer:
of the NIRC? Explain your answer. (#11, 2001 Bar Exams)
No. The MCIT is a proxy for the normal corporate
income tax, not the regular corporate income tax paid by a
Suggested Answer: corporation. For instance, a proprietary educational
institution may be subject to a regular corporate income tax
No. X is neither a managerial nor a supervisory
of 10% (depending on its dominant income), but it is
employee. Only managerial or supervisory employees are
exempt from the imposition of MCIT because the latter is
entitled to a fringe benefit subject to the fringe benefits tax.
not intended to substitute special tax rates. So is with
Even assuming that he is a managerial or supervisory
PEZA enterprises, CDA enterprises etc. ( If what is meant
employee, the small hut is provided for the convenience of
by regular income tax is the 32% tax rate imposed on
the employer, hence does not constitute a taxable fringe
taxable income of corporations, the answer would be in the
benefit. (Sec. 33 NIRC)
affirmative, because domestic corporations are 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)
57. 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 P 1M. The land was sold to B, his colleague, at Alternative Answer:
800,000 which was then the fair market value of the land.
No. A corporation which is exempted from the MCIT is
He used the proceeds to finance his trip to the US. He
not automatically exempted from the regular corporate
claims that he should not be made to pay the 6% final tax
income tax. The reason for this is that MCIT is imposed
because he did not have any actual gain on the sale. Is his
only beginning on the fourth taxable year immediately
contention correct? Why? (#8, 2001 Bar Exams)
following the year in which such corporation commenced
its business operations. Thus, a corporation may be
exempted from MCIT because it is only on its third year of
Suggested Answer: operations following its commencement of business
No. The 6% capital gains tax on sale of real property operations.
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 (Sec. ----------------------------------------------------------
24D NIRC). Actual gain is not required for the imposition of
the tax but it is the gain by fiction of law which is taxable.
TAX LAW REVIEWER
60. a. How often does a domestic corporation file income ----------------------------------------------------------

tax return for income earned during a single taxable year?
Explain the process.
62. Is a non-resident alien who is not engaged in trade or
b. What is the reason for such procedure? (#4, 2001 Bar
business or in the exercise of profession in the Philippines
Exams)
but who derived rental income from the Philippines
required to file an income tax return on April on the year
following his receipt of said income? If not, why? Explain
Suggested Answer:
your answer. (#14, 2001 Bar Exams)
a. 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 Suggested Answer:
first three quarters where the corporation shall declare its
No. The income tax on all income derived from the
quarterly summary gross income and deductions on a
Philippine sources by a non-resident alien who is not
cumulative basis (Sec. 73 NIRC). Then, a final adjustment
engaged in trade or business in the Philippines is withheld
return is required to be filed covering the total taxable income for
by the lessee as a Final Withholding Tax (Sec. 57 (A)
the entire year, calendar or fiscal (Sec. 76 NIRC)
NIRC). The government cannot require persons outside of
its territorial jurisdiction to file a return. For this reason, the
b. The reason for this procedure is to ensure the income tax on income derived from within must be
timeliness of collection to meet the budgetary needs of the collected through the withholding tax system and thus
government. Likewise, it is designed to ease the burden on the relieve the recipient of the income the duty to file income
taxpayer by providing it with an installment payment scheme, tax returns (Sec. 51 NIRC).
rather than requiring the payment of the tax on a lump-sum
basis after the end of the year.
----------------------------------------------------------
---------------------------------------------------------- 63. (a) Discuss the meaning of eth Global and
Schedular systems of taxation.
61. In the year 2000, X worked part time as a waitress in a

(b) To which system would you say that the
restaurant in Mega Mall from 8 am to 4 pm and then as a
method of taxation under the National Internal
cashier in a 24-hour convenience store in her
Revenue Code belongs? (#5, 1997 Bar Exams)
neighborhood. The total income of X for the year from the
two employers does not exceed her total personal and
Suggested Answer:
additional exemptions for the year 2000. Was she required
to file an income tax return last April? Explain your answer.
(a) A global system of taxation is one where the
(#13, 2001 Bar Exams)
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.
Suggested Answer:
Yes. An individual deriving compensation concurrently A schedular system of taxation provides fro a different
from two or more employers at any time during the taxable tax treatment of different types of income so that a separate tax
year shall file an income tax return (Sec. 51 A2(b), NIRC) return is required to be filed for each type of income and the tax
is computed on a per annum or per schedule basis.
Alternative Answer: (b) The method of taxation under the NIRC belongs
to a system which is a partly schedular and partly global.
It depends. An individual with pure compensation
income is not required to file an income tax return when
she meets the following conditions: 1. The total gross ----------------------------------------------------------
compensation income does not exceed P60,000 and 2.
The income tax has already been correctly withheld,
meaning the tax withheld is equal to the tax due. (Sec. 51
A2(b) NIRC) 64. Mr. Santos died in testate in 1989 leaving his spouse
and five children as only heirs. The estate consisted of a family
There is no mention in the problem of the amount of home and a four door apartment which was being rented to
personal and additional exemption to quantify how much is tenants. Within the year, an extra judicial settlement of the
that compensation income that did not exceed the personal estate was executed from the heirs, each of them receiving
and additional personal exemptions. There is no mention, his/her due share. The surviving spouse assumed
either of whether or not the employers withheld taxes and administration of the property. Each yea, the net income from
that the amount withheld is equal to the tax due. Whether the rental property was distributed to all, proportionately, on
or not she will be required to file an income tax return last which they paid respectively, corresponding income tax.
April 15 on the 2000 income will depend on her compliance
with the requirements of the law. In 1994, the income tax returns of the heirs were
examined and deficiency income tax assessment were issued
against each of them fro the years 1989 to 1993, inclusive, as
TAX LAW REVIEWER
having entered into an unregistered partnership. Were the imposed on the exchange (BIR Ruling No. 21 (e) 053 89, 008
assessment justified? (#12, 1997 Bar Exams) 95).
----------------------------------------------------------
Suggested Answer:
66. During the year, a domestic corporation derived the
Yes, the assessment were justified because for
following items of revenue: (a) gross receipts from a trading
income tax purposes, the co ownership of inherited property is
business; (b) interests from money placement in the banks; (c)
automatically converted into an unregistered partnership from
dividends from its stock investments in domestic corporations;
the moment the said property are used as common fund with
(d) gains from stocks transactions through the Philippine Stock
intent to produce profits fro the heirs in proportion to their share
Exchange; (e) proceeds under an insurance policy on the loss of
in the inheritance.
goods.
From the moment of such partition, the heirs are
entitled already to their respective definite shares of the estate
In the preparing the corporate income tax return, what
and the income thereof, for each of them to mange and dispose
should be the tax treatment on each of the above items? (#9,
of as exclusively his own without the intervention of eth other
1997 Bar Exams)
heirs, and , accordingly, he becomes liable individually for all
taxes in connection therewith. If after such partition, he allows
Suggested Answer:
his shares to be held in common with his co heirs under a
single management to be used with the intent of making profit
The gross receipts from trading business is includible
thereby in proportion to his share, there can be no doubt that,
as an item of income in the corporate income tax return and
even if no document or instrument for the purpose, for tax
subject to corporate income tax rate based on net income. The
purposes, at least, an unregistered partnership is formed
other items of revenue will not be included in the corporate tax
(Lorenzo One, et al v. CIR, 45 SCRA 74).
return. The interest from money market placements is subject to
a final withholding tax of 20%; dividends from domestic
Alternative Answer:
corporations are exempt from income tax; and gains from stock
transactions with Philippine Stock Exchange are subject to
No, the assessment are not justified. The mere
transaction tax which is in lieu of income tax. The proceeds
sharing of income does not of itself established a partnership
under an insurance policy on the loss of goods is not an item of
absent any clear intention of the co owners who are only
income but merely a return of capital hence not taxable.
awaiting liquidation of the estate.
Alternative Answer:
----------------------------------------------------------
The gross receipts from trading business are
65. A corporation engaged in real state development, includible as an item of income in the corporate income tax
executed deeds of sale on various subdivided lots. One buyer, return. Likewise, the gain or loss realized as a consequence of
after going around the subdivision, bought a corner lot with a the receipts of the proceeds under an insurance policy on the
good view of surrounding terrain. He paid P1.2 million, and title loss of the goods will be included in the corporate income tax
for the property was issued. A year later, the value of the lot return either as a taxable gain or a deductible loss. The gain or
appreciated to a market value of P1.6 million, and the buyer loss is arrived at by deducting from the proceeds of insurance
decided to build his house thereon. Upon inspection, however, (amount realized) the basis of the good lost (Sec. 34(a), NIRC).
he discovered that a huge tower antennae had been erected on The net income of the corporation shall be subject to corporate
the lot frontage totally blocking his view. When complained, the income tax rate of 35%.
realty company exchanged his lot with another corner lot with an
equal but with affording a better view. The other items of revenue will not be included in the
corporate income tax return. The interests from money market
Is the buyer liable for capital gains tax on the placements is subject to final withholding tax of 20%; dividends
exchange of the lots? (#8, 1997 Bar Exams) from domestic corporation are exempt from income tax; the
gains from stock transactions with the Philippine Stock
Suggested Answer: Exchange are subject to transactions tax which is in lieu of the
Yes, the buyer is subject to capital gains tax on the income tax.
exchange of the 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 (Sec.
67. A bachelor was employed by a Corporation A on the
21 (e), NIRC). Real property transaction subject to capital gains
first working day of January 1996 on a party time basis with a
tax are not limited to sales but also exchanges of property
salary of P3,500 a month,. He then received the 13 th month pay.
unless exempted by a specific provision of law.
In September 1996, he accepted another part time job from
Corporation B from which he received a total compensation of
Alternative Answer:
P14,500.00 for the year 1996. the correct total taxes were
withheld from both earnings.
No. the exchange is not subject to capital gains tax
because it is merely done to comply with the intentions of the
With the withholding taxes already paid, would he still
parties to the previous contract regarding the sale and
be required to file an income tax for his 1996 income? (#7, 1997
acquisition of a property with a good view. This is a simple
Bar Exams)
substitution of the subject of the sale and since the previous
transaction was already subjected to tax, no new tax should be
Suggested Answer:
TAX LAW REVIEWER
Yes, because what is exempt from filing are those On which of the above income is the taxable, if at all,
individual who have compensation income not exceeding in the Philippines, and how, in general terms, would such
P60,000 with the taxes correctly withheld only by one employer. income or incomes is taxed? (#6, 1997 Bar Exams)
In this case, even if his aggregate compensation income from
both his employers does not exceed P60,000 and that total Suggested Answer:
withholding taxes were correctly withheld by his employers., the
fact that he derives compensation income concurrently from two Juan, shall be taxed on both his income from the
employers at anytime during the taxable year, does not exempt Philippines and on his income from the United States because
him from filing his income tax return (RA 7497, as implemented his being a citizen makes him taxable on all income wherever
by RR No. 4 93). 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 (SNITS) whereby he
---------------------------------------------------------- shall be considered as self - employed individual. His income as
employee in the United States, on the other hand, shall be taxed
in accordance with schedular graduated rates of 1%, 2%, 3%,
based on the adjusted gross income derived by non resident
68. Mar and Joy got married in 1990. a week before their
citizen from all sources without the Philippines during each
marriage, Joy received, by way of donation, a condominium unit
taxable year.
worth P750,000 from her parents. After marriage, some
renovation were made at a costs of P150,000. The spouses
were both employed in 1991 by the same company. On 30 ----------------------------------------------------------
December 1992, their first child was born, and a second child
70. 1. What is the difference between capital gains
was born on 07 November 1993. In 1994, they sold the
and ordinary gains? (3%)
condominium unit and bought a new unit.
2. What does the term ordinary income
Under the foregoing facts, what were the events in the include? (#10, 1998 Bar Exams)
life of the spouses that had income tax incidences? (#13, 1997
Bar Exams) Suggested answer:
Suggested Answer: 1. Capital gains are gains realized from the

sale or exchange of capital assets, while ordinary gains refers to
The events in the life of spouses, Mar and Joy, which gains realized from the sale or disposition of ordinary assets.
have income tax incidences are the following:
2. The term ordinary income includes any gain
(a) Their marriage in 1990 qualifies them to claim personal from the sale or exchange of property which is not a capital
exemption from married individual; asset. These are the gains derived from the sale or exchange of
property such as stock in trade of eth taxpayer or other property
(b) Their employment in 1991 by the same company will them of a kind which property be included in the inventory of the
liable to the income tax imposed on the gross taxpayer if on hand at the close of the taxable year, or property
compensation income; held by the taxpayer primarily for sale to customers in the
course of his trade or business, or property used in trade or
(c) Birth of their first child in December 1992 would give rise to business of a character which is subject to the allowance fro
an additional exemption of P5,000 fro taxable year 1992; 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
(d) Birth of their second child in November 1993 would NIRC).
likewise entitle them to claim additional exemption of
P5,000 raising their additional personal; exemption to Alternative Answer:
P10,000 for taxable year 1993; and
The term ordinary income includes income from
(e) Sale of their condominium unit in 1994 shall make the performance of services, whether professional or personal,
spouses liable to the 5% capital gain presumed to have gains accruing from business, and profit arising from the sale or
been realized from the sale. exchange of ordinary assets.
---------------------------------------------------------- ----------------------------------------------------------
71. An individual taxpayer who owns a ten (10) doors

apartment with a monthly rental of P10, 000 each residential
unit, sold this property to another individual taxpayer. Is the
69. Juan, a Filipino citizen, has emigrated to the United
seller liable to pay the capital gains tax? (#11, 1998 Bar Exams)
States where he is now a permanent resident. He owns certain
income-earning property in the Philippines from which he
Suggested Answer:
continues to derive substantial income. He also receives income
from his employment in the United States on which the US
income tax is paid.
TAX LAW REVIEWER
No. The seller is not liable to pay the capital gains tax
because the property sold is an ordinary asset, i.e. real property 3. An individual citizen of the Philippines who is working
used in trade or business. It is apparent that the taxpayer is and deriving income from abroad as an overseas
engaged in the real estate business, regularly renting out the ten contract worker;
(10) doors apartment.
4. An alien individual, whether a resident or not of the
---------------------------------------------------------- Philippines;
5. A domestic Corporation; (#2, 1998 Bar Exams)

72. Is the price of one million pesos awarded by the
Readers Digest subject to withholding of final tax? Who is
Suggested Answer:
responsible for withholding the tax? What are the liabilities for
failure to withhold such tax? (#12, 1998 Bar Exams)
(Section 23, NIRC of 1997)
Suggested Answer:
1. A citizen of the Philippines residing therein is taxable
on all income derived from sources within and without
(a) It depends. If the prize is considered winnings
the Philippines
derived from sources within the Philippines, it is subject to
withholding of final tax (Sec. 24(B) in relation to Sec. 57(A),
2. A non resident citizen is taxable only in income
NIRC). If derived from sources without the Philippines, it is not
derived from sources within the Philippines.
subject to withholding of final tax because the Philippines tax
and regulations could not reach out to foreign jurisdictions.
3. An individual citizen of the Philippines who is working
and deriving income from abroad as an overseas
(b) The tax shall be withheld by the Readers Digest
contract worker is taxable only on income from
or local agent who has control over the payment of the prize.
sources within the Philippines.
(c) Any person required to with hold or who willfully
4. An alien individual, whether a resident or not of the
falls to withhold, shall, in addition to the other penalties provided
Philippines, is taxable only on income derived within
under the code, be liable upon conviction to a penalty equal to
the Philippines.
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
5. A domestic Corporation is taxable on all income
deficiency tax shall be collected from the payor/withholding
derived from sources within the Philippines.
agent (1st par., Sec 2.57[A], R. R. No. 2- 98].
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Any person required in the Tax Code or by rules and
regulations to with hold taxes at 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 75. Arnold, who is single, co habits with Vilma, whop is
less than ten thousand pesos (P10, 000) and suffer legally married to Zachary. Arnold and Vilma have six minor
imprisonment of not less than one (1) year but not more than ten children who live and depend upon Arnold for their chief
(10) years (1st par., Sec. 255, NIRC). support. The children are not married and not gainfully
employed.
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1. For income tax purposes, mat Arnold be
73. MC Garcia, a contractor who won the bid fro the considered as head of family?
construction of a public highway, claims as expenses, facilitation 2. Is Arnold entitled to deduct from his gross
fees which according to him is standard operating procedure in income, an additional exemption for each of his illegitimate
transactions with the government. Are these expenses allowable child? (#4, 1998 Bar Exams)
as deduction from gross income? (#13, 1998 Bar Exams)
Suggested Answer:
Suggested Answer: 1. Yes. An unmarried man who has illegitimate
minor children who live with him and depend upon him for their
No. the alleged facilitation fees which he claims as chief support is considered as head of family(RR No. 2 98
standard operating procedure in transaction with the implementing Sec. 35, NIRC).
government comes in the form of bribes or kickback which are 2. No. Arnold is only entitled to deduct
not allowed as deductions from gross income (Sec. 34 (A)(1)(c), additional personal exemption for four (4) out of the six (6)
NIRC). illegitimate children. The maximum number of the dependants
fro purposes of the additional personal exemption is four, (Sec.
---------------------------------------------------------- 35, NIRC).
----------------------------------------------------------
74. From what sources of income are the following
persons/ corporations taxable by the Philippine government?
1. Citizen of the Philippines residing there. 76. Give the requisites for deductibility of loss. (#5, 1998
Bar Exams)
2. Non resident citizen ;
TAX LAW REVIEWER
Suggested Answer: subject to the schedular capital gains tax of 10% for the first
P100,000 and 20% fro the excess thereof (Sec. 21 (d), NIRC).
The requisites for deductibility of a loss are a) loss
belongs to the taxpayer; b) actually sustained and charged off Alternative Answer:
during the taxable year; c) evidenced by a closed and
completed transaction; d) not compensated by insurance or The exchange effected in 1995 did not qualify as a tax
other forms of indemnity; e) not claim as a deduction fro estate free exchange because there is no showing that the three
tax purposes in case of individual taxpayers; f) if it is a casualty brothers gain control of eth corporation by acquiring at least
loss it is evidenced by a declaration of loss filed within 45 days 21% of the voting rights. Since the entire gain on the exchange
with the BIR. was previously subjected to income tax, then, the sale will also
be taxable if a gain results there from. In the instant case, the
---------------------------------------------------------- sale will not subject to any internal revenue tax other than the
documentary stamp tax, because the seller does not realize any
77. 1. What is the proper allowance fro
gain from the sale. The gain is measured by the difference
depreciation of any property used in trade or business?
between the amount realized (selling price) and the basis of
2. What is the annual depreciation of a
property. Incidentally, the basis to him is his share in the value of
deductible fixed asset with a cost of P100, 000 and an estimated
eth property received at the time of exchange, which is P2
useful life of 20 years and salvage value of P10, 000 after its
million, an amount, just equal to the amount realized from the
useful life? (#6, 1998 Bar Exams)
sale.
Suggested Answer:
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1. The proper allowance of depreciation of
any property used in trade or business refers to the reasonable
78. X, a multinational corporation doing business in the
allowance for the exhaustion, wear and tear (including
Philippines donated 100 shares of stock of said corporation to
reasonable allowance for obsolescence) of said property. The
Mr. Y, its resident manager in the Philippines.
reasonable allowance shall include, but not limited to, an
allowance computed under any of the following methods:
1.) What is the tax liability, if any, of X corporation?
2.) Assuming the shares of stocks were given to Mr. Yin
2. The annual depreciation of eth depreciable
consideration of his services to the corporation, what are
fixed asset may be computed on the straight line method
the tax implications? Explain. (#5, 1996 Bar Exams)
which will allow the taxpayer to deduct an annual depreciation of
P4, 500, arrived at by dividing the depreciable value (P100, 000
Suggested Answer:
P10, 000) of P90, 000 by the estimated useful life (20 years).
1.) Foreign corporations effecting a donation is
----------------------------------------------------------
subject to donors tax only if the property donated is located in
the Philippines. Accordingly, donation of a foreign corporation of
Three bothers inherited in 1992 a parcel of land its own shares of stocks in favor of resident employees, is not
valued for real estate tax purposes at P3.0 million which they subject to donors tax (BIR Ruling No. 018-87, January 26,
held in co ownership. in 1995, they transferred the property to 1987). However, if 85% of the business of the foreign
a newly organized corporation as their equity which was placed corporation is located in the Philippines or the shares donated
at the zonal value of P6.0 million. In exchange for the property, have acquired business situs in the Philippines, the donation
the three bothers thus each received shares of stock of may be taxed in the Philippines subject to the rule of reciprocity.
corporation with a total par value of P2.0 million or, altogether, a 2.) If the shares of tax were given to Mr. Y in the
total of P6.0 million. No business was done by the Corporation consideration of his services to the corporation, the same shall
and the property remained idle. In the early part of 1997, one of constitute taxable compensation income to the recipient
the brothers, who was in dire need of funds, sold his shares to because it is a compensation for services rendered under an
the two bothers fro 2 million. employer-employee relationship, hence, subject to income tax.
Is the transaction subject to any internal revenue tax The par value or stated value of the shares issued also
(other than the documentary stamp tax)? (#10, 1997 Bar constitutes deductible expense to the corporation provided
Exams) it is subjected to withholding tax on wages.
Suggested Answer:
Yes. The exchange inherited 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 79. X is employed as a driver of a corporate lawyer and
deferred the recognition of income on the exchange transaction. receives a monthly salary of P5, 000.00 with free board and
The gain subject to income tax in the sale is measured by the lodging with an equivalent value of P1, 500.00.
difference between the selling price of eth shares (P2 Million) 1.) What will be the basis of Xs income tax? Why?
and the basis of the real property in the hands of the transferor 2.) Will your answer in question (a) be the same if
at the time of exchange which is the fair market value of his Xs employer is an obstetrician? Why? (#6, 1996
share in the real property at the time of inheritance (Sec. 34(b) Bar Exams)
(2), NIRC). The net gain from the sale of the shares of stock is
TAX LAW REVIEWER
Suggested Answer:
1.) The basis of Xs income tax would depend on
whether his employer is an employee or a practicing corporate 2) No. The commutation of leave of credits
lawyer. If his employer is an employee, the basis of Xs income more commonly known as terminal leave pay, i.e., the cash
tax is P6,500.00 equivalent to the total of the basic salary and equivalent of accumulated vacation and sick leave credits given
the value of the board and lodging. This is so because the to an officer or employee who retires, or separated from the
employer/ corporate lawyer has no place of business where the service through no fault of his own, is exempt from income tax.
free board and lodging may be given. On the other hand, if the (BIR ruling 238-91 dated November 8, 1991; Commissioner vs.
corporate lawyer is a practicing lawyer (self-employed), x should CA and Efren Castaneda, GR No. 96016, October 17, 1991).
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.
81. 1. Who are liable for the payment of Value-
Added Tax?
2.) If the employer is an obstetrician who is self-
2. What are the characteristics of the Value-
employed, the basis of Xs income will only be P5, 000.00 if it is
Added Tax?
proven that the free board and lodging is given within the
3. Give at least three (3) real estate
business premises of said employer for his convenience and
transactions, which are not subject to the Value-Added
that the free lodging is required to be accepted by X as condition
Tax.
for employment. Otherwise, X would be taxed on P6,500.00.
4. What is the basis of the Value-Added Tax on
taxable sales of real property? (#11, 1996 Bar Exams)
----------------------------------------------------------
80. 1. X, an employee of ABC Corporation died. Suggested Answer:
ABC Corporation gave Xs widow an amount equivalent to Xs 1) The persons liable for the value-added tax are:
salary for one year. a.) Sellers of goods and properties in the
Is the amount considered taxable income to the course of trade or business;
widow? Why? b.) Sellers of services in the course of trade or
business, including lessors of goods and
2. A, an employee of the Court of appeals, properties;
retired upon reaching the compulsory age of 65 years. Upon c.) Importers f taxable goods, whether in the
compulsory retirement, A received the money value of his course of business or not
accumulated leave credits in the amount of P500,000.00.
Is said amount subject to tax? Explain. (#9, 2) The value-added tax is an indirect tax and the amount
1996 Bar Exams) of tax may be shifted or passed on to the buyer, transferee or
lessee of the goods, properties or services.
Suggested Answer:
Alternative Answer:
1) No. The amount received by the widow
from the decedents employer may either be a gift or a The value-added tax has the following characteristics:
separation benefit on account of death. Both are exclusions a.) It is an indirect tax where tax shifting is always
from gross income pursuant to provision of Section 28(b) of the presumed:
Tax Code. b.) It is consumption-based;
c.) It is imposed on the value-added in each stage of
Alternative Answer: distribution;
d.) It is a credit invoice method value-added tax; and
No. Since the amount was given to the widow and not e.) It is not a cascading tax
to the estate, it becomes obvious that the amount is more of a
gift. In one U.S. tax case (Estate of Hellstrom vs. 3) Real estate transactions, which are exempt from the
Commissioner, 24 T.C. 916), it was held that payments to the value-added tax, are:
widow of the president of a corporation of the amount the a.) Sale of real property not primarily held for sale or
president would have received in salary if he lived out the year lease in the ordinary
constituted a gift and not an income. course of trade or business;
b.) Sale of real property utilized for socialized housing
The controlling facts, which would lead to the under R.A. No. 7279;
conclusion that the amount received by the widow is not an c.) Sale of real property utilized under the low-cost
income, are as follows: housing under BP Blg. 220.
a.) The gift was made to the widow rather than the
estate: 4) The basis of the Value-Added Tax on taxable sale of
b.) There was no obligation for the corporation to real property is Gross Selling Price which is either selling price
make further payments to the deceased; stated in the sale document or the Zonal Value, whichever is
c.) The widow had never worked for the corporation; higher. In the absence of zonal values, the gross selling price
d.) the corporation received no economic benefit; and shall refer to the market value as shown in the latest tax
e.) the deceased had been fully compensated for his declaration or the consideration; whichever is higher.
services (Estate of
Sydney Carter vs. Commissioner, 453F, 2d
61 (2d Cir. 1971). ----------------------------------------------------------
TAX LAW REVIEWER
82. moral damages for his pain and suffering, and P100,000 as
exemplary damages. He was able to collect in full from the
1.) What is gross income for purposes of the
judgment. How much income did he realize when he collected
income tax?
on the judgment? Explain. (#2, 1995 Bar Exams)
2.) How does income differ from capital? Explain.
Suggested Answer:
Suggested Answer:
1.) Mr. Adrian must report the imputed rental value
1.) Gross Income means all income from whatever
of the house and limousine as income. If the rental value
source derived including (but not limited to) compensation for
exceeds the personal needs of Mr. Adrian because he is
services, including fees, commissions and similar items: gross
expected to provide accommodation in said house for company
income from business; gains derived from dealings in property;
guests or the car is used partly for business purpose, then Mr.
interest; rents; royalties; dividends; annuities; prizes and
Adrian is entitled only to a ratable rental value of the house and
winnings; pensions: and partners distributive share of the gross
limousine as exclusion from gross income and only a
income of general professional partnership (Sec.28, NIRC).
reasonable amount should be reported as income. This is
because the free housing and use of the limousine are given
Alternative Answer:
partly for the convenience and benefit of the employer (Collector
vs. Henderson).
a.) Gross income means all wealth which flows into the
taxpayer other than as a mere return of capital. It includes the
Alternative Answer:
forms of income specifically described as gains and profits
including gains derived from the sale or other disposition of
Remuneration for services although not
capital.
given in the form of cash constitutes compensation income.
Accordingly, the value for the use of the residential house is part
b.) Gross income means income (in the broad sense)
of his compensation income which he must report for income tax
less income which is, by statutory provision or otherwise,
purposes. However, if the residential house given to Mr. Adrian
exempt from the tax imposed by law (Sec. 36, Rev. Reg. No.2).
for his free use as an executive is also used for the benefit of
Gross income from business means total sales, less cost of
the corporation/employer, such as for entertaining customers of
goods sold, plus any income from investments and from
the corporation, only 50% of the rental value or depreciation (if
incidental or outside operations or sources. (Sec. 43, Rev. Reg.
the house is owned by the corporation) shall form part of
No.2)
compensation income (RAMO 1-87).
2.) Income differs from capital in that income is any
The free use of a limousine and the
wealth which flows into the taxpayer other than a return of
membership in a country club is not part of Mr. Adrians
capital while capital constitutes the investment which is the
compensation income because they were given for the benefit
source of income. Therefore, capital is fund while income is the
of the employer and are considered to be necessary incidents
flow. Capital is wealth, while income is the service of wealth.
for the proper performance of his duties as an executive of the
Capital is the tree while income is the fruit (Vicente Madrigal, et.
corporation.
Al v. James Rafferty, 38 Phil. 414).
The membership fee in the country club
----------------------------------------------------------
needs to be reported as income. It appears that the
83. membership of Mr. Adrian to the country club is primarily for the
1.) Mr. Adrian is an executive of a big business benefit and convenience of the employer. This is to enable Mr.
corporation aside from his salary, his employer provides him Adrian to entertain company guests (Collector vs. Henderson).
with the following benefits: free use of a residential house in an
exclusive subdivision, free use of a limousine and membership 2.) No, the free uniforms, free living quarters and
in a country club where he can entertain customers of the the free meals inside the camp are not income to Capt. Canuto
corporation. because these are facilities or privileges furnished by the
employer for the employers convenience which are necessary
Which of these benefits, if any, must Mr. Adrian report as incidents to proper performance of the military personnels
income? Explain. duties.
3.) None. The P200,000 moral and exemplary
damages are compensation for injuries sustained by Mr. Infante.
2.) Capt. Canuto is a member of the armed Forces The P400,000.00 reimbursement for the hospitalization
of the Philippines. Aside from his pay as a captain, the expenses and the P60,000.00 for salaries he failed to receive
government gives him free uniforms, free living quarters in are amounts of any damages received whether by suit or
whatever military camp he is assigned, and free meal inside the agreement on account of such injuries. Section 28(b)(5) of the
camp. Are these benefits income to Capt. Canuto? Explain. Tax Code specifically excludes these amounts from the gross
income of the individual injured. (Section 28(b).NIRC and Sec.
3.) Mr. Infante was hit by a wayward bus while on 63 Rev. Reg. No.2)
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 Alternative Answer:
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 The income realized from the judgment is
was able to obtain a final judgment awarding him P400,000.00 only the recovery for lost salaries. This constitutes taxable
as reimbursement for his hospitalization. P60,000 for the income because were it not for the injury, he could have
salaries he failed to receive while hospitalized, P200,000 as
TAX LAW REVIEWER
received it from his employer as compensation income. All the

other amounts received are either compensation for the injuries 85. In 1990, Mr. Naval bought a lot for P1, 000,000.00 in a
or damage received on account of such injuries which are subdivision with the intention of building his residence on it. In
exclusions from gross income pursuant to Section 28(b)(5) of 1994, he abandoned his plan to build his residence on it
the Tax Code. 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.
84. Mr. Lajojo is a big time swindler. In one year he was
2.) Is there any income tax due on the sale?
able to earn P1 Million from his swindling activities. When the
Explain. (#9, 1995 Bar Exams)
Commissioner of Internal revenue discovered his income from
swindling, the Commissioner assessed him a deficiency income
Suggested Answer:
tax for such income.
The income of Mr. Lajojo protested the assessment on
the following grounds:
1.) The land is a capital asset because it is neither
for sale in the ordinary course of business nor a property used in
1.) The income tax applies only to legal income, not to illegal
the trade or business of the taxpayer. (Sec. 33, NIRC).
income:
2.) Yes. Mr. Naval is liable to the 5% capital gains
2.) Mr. Lajojos receipts from his swindling did not constitute
tax imposed under Sec. 21(e) of the Tax Code based on the
income because he was under obligation to return the
gross selling price of P800,000.00 which is an amount higher
amount he had swindled, hence, his receipt from swindling
than the zonal value.
was similar to a loan, which is not income, because for
every peso borrowed he has a corresponding liability to
pay one peso: and
----------------------------------------------------------
3.) If he has to pay the deficiency income tax assessment,
there will be hardly anything left to return to the victims of
the swindling.
86. Mr. Quiroz worked as chief accountant of a hospital for
How will you rule on each of the three grounds for the forty-five years. When he retired at 65 he received retirement
protest? Explain. (#8, 1995 Bar Exams) pay equivalent to two months salary for every year of service as
provided in the hospital BIR approved retirement plan.
Suggested Answer:
1.) The contention that the income tax applies to legal The Board of Directors of the hospital felt that the
income and not to illegal income is not correct. Sec. 28(a) of the hospital should give Quiroz more than what was provided for in
Tax Code includes within the purview of gross income all income the hospitals retirement plan in view of his loyalty and
from whatever source derived. Hence, the illegality of the invaluable services for forty-five years; hence, it resolved to pay
income will not preclude the imposition of the income tax him a gratuity of P1 Million over and above his retirement pay.
thereon.
The Commissioner of Internal Revenue taxed the P1
2.) The contention that the receipts from his swindling did Million as part of the gross compensation income of Quiroz who
not constitute income because of his obligation to return the protested that it was excluded from income because (a) it was a
amount swindled is likewise not correct. When a taxpayer retirement pay, and (b) it was a gift.
acquires earnings, lawfully or unlawfully, without the consensual
recognition, expressed or implied, of an obligation to repay and 1.) Is Mr. Quiroz correct in claiming that the
without restriction as to their disposition, he has received additional P1 Million was
taxable income, even though it may still be claimed that he is retirement pay and therefore excluded from
not entitled to retain the money, and even though he may still be income? Explain.
adjudged to restore its equivalent (James vs. U.S., 366 U.S. 2.) Is Mr. Quiroz correct in claiming that the
213, 1961). To treat the embezzled funds not as taxable income additional P1 Million was gift and therefore
would perpetuate injustice by relieving embezzlers of the duty of excluded from income? Explain. (#11, 1995
paying income taxes on the money they enrich themselves with Bar Exams)
through embezzlement, while honest people pay their taxes on
every conceivable type of income. (James vs. U.S.) Suggested Answer:
3.) The deficiency income tax assessment is a direct tax 1.) No. The additional P1 Million is not a retirement
imposed on the owner which is an excise on the privilege to pay but a part of the gross compensation income of Mr. Quiroz.
earn an income. It will not necessarily be paid out of the same This is not a retirement benefit received in accordance with a
income that was subjected to the tax. Mr. Lajojos liability to pay reasonable private benefit plan maintained by the employer as it
the tax is based on his having realized a taxable income from was not paid out of the retirement plan. Accordingly, the amount
his swindling activities and will not affect his obligation to make received in excess of the retirement benefits that he is entitled to
restitution. Payment of the tax is a civil obligation imposed by receive under the BIR-approved retirement plan would not
law while restitution is a civil liability arising from a crime. qualify as an exclusion from gross income.
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TAX LAW REVIEWER
2.) No. The amount received was in consideration that Osorio keep the car. The company of Perez deducted the
of his loyalty and invaluable services to the company which is cost of the car as a business expense.
clearly a compensation income received on account of The Commissioner of Internal Revenue included the
employment. Under the employers motivation test, emphasis fair market value of the car as income of Osorio who protested
should be placed on the value of Mr. Quiroz services to the that the car was a gift and therefore excluded from income.
company as the compelling reason for giving him the gratuity, Who is correct, the Commissioner or Osorio? Explain.
hence it should constitute a taxable income. The payment (#10, 1995 Bar Exams)
would only qualify as a gift if there is nothing but good will,
esteem and kindness which motivated the employer to give the Suggested Answer:
gratuity. (Stanton vs. U.S.,186F. Supp.393). such is not the
case in the herein problem. The Commissioner is correct. The car, having been
given to Mr. Osorio is consideration of having introduced Mr.
Alternative Answer: Perez to a foreign importer which resulted to a profitable
business deal, is considered to be a compensation for services
Yes. The P1 Million is not compensation income rendered. The transfer is not a gift because it is not made out of
subject to income tax but a gift from his employer. There was a detach or disinterested generosity but for a benefit accruing to
no evidence presented to show that he was not fully Mr. Perez. The fact that the company of Mr. Perez takes a
compensated for his forty-five years of service. If his services business deduction for the payment indicates that it was
contributed in a large measure to the success of the hospital, it considered as a pay rather than a gift. Hence, the fair market
did not give rise to a recoverable debt. The P1 Million is purely value of the car is includable in the gross income pursuant to
a gratuity from the company. It is a taxable gift to the transferor. Sec. 28(a)(1) of the Tax Code (See 1974 Federal Tax
Under the Tax Code, gifts are excluded from gross income Handbook, p. 145). A payment though voluntarily, if it is in
therefore exempt from income tax. (Sec.28(b)(3), NIRC; return for services rendered, or proceeds from the constraining
Pirovano vs. Commissioner) force of any moral or legal duty or a benefit to the payor is
anticipated, is taxable income to the payee even if characterized
as a gift by the payor (Commissioner vs. Duberstein, 363 U.S.
---------------------------------------------------------- 278).
Alternative Answer:
87. Mr. Francisco borrowed P10,000.00 from his
friend Mr. Gutierrez payable in one year without interest. When
Mr. Osorio is correct. The car was not payment for
the loan became due Mr. Francisco told Mr. Gutierrez that he
services rendered. There was prior agreement on negotiations
( Mr. Francisco) was unable to pay because of the business
between Mr. Osorio and Mr. Perez that the former will be
reverses. Mr. Gutierrez took pity on Mr. Francisco and
compensated for his services. Mr. Perez, in behalf of his
condoned the loan. Mr. Francisco was solvent at the time he
company, gave the car to Mr. Osorio out of gratitude. The
borrowed the P10,000.00 and at thetime the loan was
transfer having been made gratuitously should be treated as a
condoned.
gift subject to donors tax and should be excluded from the
Did Mr. Francisco derive any income from
gross income of the recipient, Mr. Osorio. The Commissioner
the cancellation or condonation of his indebtedness? Explain.
should cancel the assessment of deficiency income tax to Mr.
Osorio and instead assess deficiency donors tax on Mr. Perez
company. (Sec. 28(b)(3), NIRC; Pirovano vs. Commissioner)
Suggested 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 89. Mr. Rodrigo, an 80-year old retired businessman, fell
considered as a gift from the creditor to the debtor and need not in love with a 20-year old Tetchie Sonora, a night club hospitality
to be included in the latters gross income. girl. Although she refused to marry him she agreed to be his
live-in partner.
---------------------------------------------------------- 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
88. Mr. Osorio, a bank executive, while playing golf with
Million.
Mr. Perez, a manufacturing firm executive, mentioned to the
The Commissioner of Internal Revenue found that the
latter that his (Osorio) bank had just opened a business
property was transferred to Tetchie Sonora by Mr. Rodrigo
relationship with a big foreign importer of goods which Perez
because the companionship she was providing him.
company manufactures. Perez requested Osorio to introduce
Accordingly, the Commissioner made a determination that
him to this foreign importer and put in a good word for him
Sonora had compensation income of P10 million in the year the
(Perez), which Osorio did. As a result, Perez was able to make
condominium unit was transferred to her and issued a deficiency
a profitable business deal with the foreign importer.
income tax assessment.
In gratitude, Perez, in behalf of his manufacturing firm,
Tetchie Sonora protests the assessment and claims
sent Osorio an expensive car as a gift. Osorio called Perez and
that the transfer of the condominium unit was a gift and
told him that there was really no obligation on the part of Perez
therefore excluded from income.
or his company to give such expensive gift. But Perez insisted
TAX LAW REVIEWER
How will you rule on the protest of Tetchie Sonora? Mr. Domingo will realize an income when
Explain. (#12, 1995 Bar Exams) 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.
Suggested Answer: 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
I will grant the protest and cancel the assessment. date.
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. Sonoras
companionship. The transfer being gratuitous is subject to
91. Mr. Jacobo worked for a manufacturing firm. Due to
donors tax. Mr. Rodrigo should be assessed deficiency donors
business reverses the firm offered voluntary redundancy
tax and a 50% subcharge imposed for fraudulently simulating a
program in order to reduce overhead expenses. Under the
contract of sale to evade donors tax. (Sec.91(b), NIRC).
program an employee who offered to resign would be given
separation pay equivalent to his three months basic salary for
----------------------------------------------------------
every year of service. Mr. Jacobo accepted the offer and
received P400,000 as separation pay under the program.
90. Mr. Domingo owns a vacant parcel of land. After all the employees who accepted the offer were
He leases the land to Mr. Enriquez for ten years at a rental of paid, the firm found its overhead still excessive. Hence it
P12,000.00 per year. The condition is that Mr. Enriquez will adopted another redundancy program. Various unprofitable
erect a building on the land which will become the property of departments were closed. As a result, Mr. Kintanar was
Mr. Domingo at the end of the lease without compensation or separated from the service. He also received P400, 000.00 as
reimbursement whatsoever for the value of the building. separation pay.
Mr. Enriquez erects the building. Upon
completion the building had a fair market value of P1 Million. At 1.) Did Mr. Jacobo derive income when he received
the end of the lease of the building is worth only P900,000.00 his separation pay? Explain.
due to depreciation. 2.) Did Mr. Kintanar derive income when he
Will Mr. Domingo have income when the received his separation pay/ explain. (#6, 1995
lease expires and becomes the owner of the building with a fair Bar Exams)
market value of P900,000.00? how much income must he
report on the building? Explain. (#3, 1995 Bar Exams) Suggested Answer:
Suggested Answer: 1.) Yes. Mr. Jacobo derived a taxable income

when he received his separation pay because his separation
When a building is erected by a lessee in from employment was voluntary on his part in view of his offer to
the leased premises in pursuance of an agreement with the resign. What is excluded from gross income is any amount
lessor that the building becomes the property of the lessor at the received by an official or employee as a consequence of
end of the lease, the lessor has the option to report income as separation of such official or employee from the service of the
follows: employer for any cause beyond the control of the said official or
employee (Sec. 28, NIRC)
1.) The lessor may report as income the market
value of the building at the time when such building is Alternative Answer:
completed: or
2.) The lessor may spread over the life of the lease No. Mr. Jacobo did not derive any taxable income
the estimated depreciated value of such building at the because the separation pay was due to a retrenchment policy
termination of the lease and report as income for each year of adopted by the company so that any employee terminated by
the lease an aliquot part thereof (Sec. 49, RR No. 2). virtue thereof is considered to have been separated due to
causes beyond the employees control. The voluntary
Under the first option, the lessor will have no income redundancy program requiring employees to make an offer to
when the lease expires and becomes the owner of the building. resign is only considered as a tool to expedite the lay-off of
The second option will give rise to an income during the year of excess manpower whose services are no longer needed by the
lease expiration of P90,000.00 or 1/10 of the depreciated value employer, but is not the main reason or cause for the
of the building. termination.
The availment of the first option will require Mr. 2.) No. Mr. Kintanar did not derive any income
Domingo to report an income of P1,000,000.00 during the year when he received his separation pay because his separation
when the building was completed. A total of P900,000.00 from employment is due to causes beyond his control. The
income will be reported under the second option but will be separation was involuntary as it was a consequence of the
spread over the life of the lease or P90,000.00 per year. closure of various unprofitable departments pursuant to the
redundancy program.
Alternative Answer:
----------------------------------------------------------
TAX LAW REVIEWER
return for taxable year 1989, its gains derived from the sale of
the two(2) condominium units as follows:
92. 1) X sold a piece of land to the United Church of Unit A

Christ of Quezon City, Inc. The land is to be devoted strictly for Unit B
religious purposes by the Church. When the Church tried to (316.5 sq. ft)
register the title of the land, the Register of Deeds refused (322 sq. ft.)
claiming that the capital gains tax was not paid. Is the
transaction exempt from the capital? Reasons. (#13, 1993 Bar Proceeds from P3,933,679 +
Exams) P4,224,463 = P8,158,142
Sale
Suggested Answer:
Less:
No. under Section 21(e) in relation to Section 49(a)(4) a. Acquisition Cost P1,501,295 +
of the National Internal Revenue Code, the seller is the one P1,529,755 = P3,031,050
liable for the payment of the capital gains tax from the sale of (Deed of Sale)
real property by an individual taxpayer. Meanwhile, the Church
in this instant case is the buyer. Section 28 (4) of the 1987 b. Payment of Realty P49,248 +
Constitution, which exempts church lands, buildings, and P55,413 = P104,661
improvements, does not apply because the obligation to pay the Tax
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 Total (a) (b) P1,550,534 +
precedent for the registration of the transfer certificate of title to P1,585,168 = P3,135,711
real property, the non-payment herein by the seller is a valid
reason for the Registry of Deeds to deny the transfer of the title Gains P2,383,136 +
to the subject land. P2,639,295 = P5,022,431
Alternative Answer: Without going into computations, answer the following

question:
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 capital Since ABC derived gains from the sale of
gains tax, for which X is liable. It is immaterial that the land will condominium units, should it pay the 5% capital gains tax, 35%
be used exclusively for religious purposes; if there is any corporate income tax or none of the above because the
exemption, then it applies to Church, and not to X, the vendor. corporation is a real state dealer? Discuss. (#3, 1992 Bar
Exams)
b) No. The tax exemption granted to churches in the
Constitution refers to property tax and not to capital gains tax Suggested Answer:
which is an income tax. Besides, the capital gains tax is the
liability of the seller X and not the purchaser. ABC corporation must pay the 35% corporate income
tax.
2) Juan Panalowon a damage suit for P500,000.00 against The National Internal Revenue Code does not provide
Juan Talo. Panalo got a writ of execution and made a levy on for the payment of corporation of 5% capital gains tax on the
the lot of Talo. The lot was sold at public auction where Panalo sale or real property, whether considered capital assets or not.
was the highest bidder for P500,000.00. Panalo refused to pay Such income is included in the computation of net income
any capital gains tax on his purchase of said lot. Your opinion. (Gross taxable income less deductions0 and is subject to the tax
(#16, 1993 Bar Exams) rate of 35%.
The capital gains tax from sales of real property is The capital gains derived will only form a part of the
payable by the seller (Section 21 (e) in relation to Section 49 (a) taxable income of the taxpayer susceptible to deductions.
(4) of the NIRC). Accordingly, the net capital gain on the sale may not necessarily
be subject to the 35% tax. The taxpayers total income and
Hence, Panalo cannot refuse to pay the capital gains deductions for the year must be considered.
tax on his purchase of said lot.
It is immaterial whether the corporation is a real state
Alternative Answer: dealer or not.
Panalo is not liable for capital gains tax as only the 4) Oriental, Inc. holds a proprietary share of Capital
vendor. In this case, Talo, is liable therefore, if at all. Gold Club. Inc. It assigned without any consideration this share
to X, one of its foreign consultants, to enable him to used its
facilities for the duration of his stay in the Philippines. X signed a
3) ABC, a domestic corporation sold in 1989 two (2) Declaration of Trust where he acknowledged that the share is
condominium units of Legaspi Towers in Roxas Blvd. for owned by Oriental, Inc. and where he promised to transfer the
P8,158,142.00. Taxpayer Corporation declared in its income tax same to whoever will succeed him as consultant. When Xs
TAX LAW REVIEWER
contract with Oriental, Inc expired, he left the Philippines and Assignment of Shares, the absolute ownership of ABC
signed for free the share to Y, his successor in office. What tax, Computer Corporation was explicitly recognized.
if any, can be imposed by the BIR on the transaction? (#14,
1993 Bar Exams) 6) Cebu Development Inc. has an authorized capital
stock of P5,000,000.00 divided into 50,000 shares with a par
Suggested Answer: value of One Hundred Pesos (P100.00) per share. Of the
authorized capital stock, twenty-five thousand (25,000) shares
The BIR cannot impose any tax because there was no real have been subscrided. Mr. Juan Legaspi is a stockholder of CDI
transfer of the ownership of the subject Capitol Golf Club, Inc. where he has subscription amounting to 13,000 shares. To fully
(Capitol) proprietary share from X to Y. Oreintal, Inc. is the pay his unpaid subscription in the amount of P950,000.00 Mr.
true owner of the Capitol proprietary share. It remained the true Legaspi transferred to the corporation a parcel of land that he
owner from the time of the Capitol shares use to Y. Oriental owns by virtue of a Deed of Assignment. Upon investigation, the
remained the legal owner thereof all throughout, while X and Y BIR discovered that Mr. Legaspi acquired said property for only
are only the beneficial owners. P500,000.00.
Alternative Answers: 1) Is Mr. Legaspi liable for any taxable gain? (#11,
1991 Bar Exams)
a) The value of the use of the share may be
considered compensation income to both X and Y subject to Suggested Answer:
income tax. The revocable trust may not considered a
disposition of a share of stock subject to capital gains tax. The transfer by Mr. Legaspi to the corporation of the
parcel of land in payment of his unpaid subscription did not
b) Since the transfer does not involve any increase his stockholding in the corporation. It cannot be said
consideration. X is not subject to income tax. While the transfer that he acquired control of the corporation by virtue of the
is gratuitous, there is no donative intent. Thus, the transaction is transfer of the land. His percentage of stockholdings in the
not subject to donors tax. However, since the certificate is capital stock of the corporation remains the same after the
evidence of interest in the Property of the corporation, the transfer as before. Therefore, Mr. Legaspi derived taxable gain
transfer of the said certificate is subject to the documentary for his economic gain which was realized by virtue of the
stamp tax of P0.20 on each P200 or fractional part thereof, of exchange of the land for the liability for the subscription.
the face value of such certificate, in accordance with Section
178 of the NIRC (BIR Ruling 235-89). Alternative Answer:
c) If the BIR puts value to the playing rights, then the Mr. Legaspi is not liable for any taxable gain. The
transfer to the expatriate, that the value could be treated as transaction amounted to an exchange of shares of property for
compensation to the expatriate, hence, taxable. shares of stock as a result of which the property transferor
acquired control of the corporation. The 13,000 shares of stock
5) ABC Computer Corp., purchased some acquired in exchange of property was more than fifty percent
years ago Membership Certificate No. 7 from the Calabar Golf (50%) of the total subscribed capital stock of Cebu Development
Club, Inc. for P300,000.00. In 4 September 1985, it transferred Inc. (CDI) that qualified the transactions a tax exempt under the
the same to Mr. John Johnson, its American computer provisions of Sec. 34 (2) of the National Internal Revenue
consultant, to enable him to avail of the facilities of the club Code.
during his stay here. The consultancy agreement expired two (2)
years later. In the mean time, the value of the Club share 2) 2) Is the CDI liable for any taxable gain?
appreciated and what was purchased by the corporation at (#11, 1991 Bar Exams)
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 Suggested Answer:
James, the new consultant of the firm and the newly designated
playing representative under a Deed of Declaration of Trust and CDI itself is not liable for any taxable gain since
Assignment of Shares wherein the former acknowledged the subscription payments are not considered as taxable income
absolute ownership of ABC Computer Corp. over the share, that being merely investments in the corporation. However, a taxable
the assignment was without any consideration, and that the incidence may occur as and when the corporation sells the
share was placed in his name because the Club required it to be parcel of the land for a price over and above the value of the
done. shares of stock or in this case over and above P950,000.00.
Until such time, however, there is no realizable income on the
Is the assignment/transfer of the shares from Johnson part of the corporation.
to James subject to income tax?
----------------------------------------------------------
Suggested Answer:
1) In a qualified tax-free exchange of property for shares
The assignment of transfer of shares from Johnson to
under Section 34 (c) (2) of the Tax Code, what is the tax basis
James is not subject to income tax. There had been no real
for computing the capital gains on: (a) the sale of the assets
change of ownership that took place. There having been actual
received by the Corporation: and (b) the sale of the shares
sale or exchange, no income tax incidence can be said to have
received by the stockholders in exchange of the assets? (#4,
occurred. In addition, there was really no income realized or
1994 Bar Exams)
received considering that in the Deed of Declaration of Trust and
TAX LAW REVIEWER
2) In a qualified merger under Section 34 (c) (2) of the Jose Bautista was separated due to his failing
Tax Code, what is tax basis for computing the capital gains on: eyesight. He was given P500,000.00 as separation pay.
(a) the sale of the assets received by the surviving corporation
from the absorbed corporation; and (b) the sale of the shares of All the three (3) were not qualified to retire under the
stock received by the stockholders from the surviving BIR-approved pension plan of the corporation.
corporation? (#4, 1994 Bar Exams)
1) Is the separation pay given to Reyes subject to
Suggested Answer: income tax?
1) In a qualified tax free exchange of the property for the 2) How about the separation pay received by Cruz?
shares under Section 34 (c) (2) Tax Code, the tax basis for
computing the gain on the: 3) How about the separation pay received by Bautista?
a) sale of the assets received by the corporation shall be
the original/historical cost (i.e. purchase price plus Suggested Answer:
expenses of acquisition) of the property/assets given
in exchange of the shares of stock. 1) The separation pay given to Reyes is subject to
b) Sales of the shares of stock received by the income tax as compensation income because it arises from a
stockholders in exchange of the assets shall be the service rendered pursuant to an employer-employee
original/historical cost of the property given in relationship. It is considered an exclusion from gross income
exchange of the shares of stock. because the rule in taxation is tax construed in strictissimi juris
or the rule on strict interpretation of tax exemptions.
Alternative Answer:
2) The separation pay received by Cruz is not subject to
1) The basis in computing capital gains tax in a qualified income tax because his separation from the company was
tax-free exchange under Sec. 34 (c) (2) is: involuntary (Sec. 28 b(7), Tax Code).
(a) With respect to the assets received by the corporation 3) The separation pay received by Bautista is likewise
the same as it would be in the hands of the transferor not subject to tax. His separation is due to disability, hence
increased by the amount of the gain recognized to the involuntary.
transferor on the transfer.
(b) With respect to the shares received by the Under the law, separation pay received through involuntary
stockholders in exchange of the assets the same as causes are exempt from taxation.
the basis of the property, stock or security 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 share holder
and the amount of any gain that was recognized on
the exchange. 94. Born of a poor family on 14 February 1944, Mario
worked his way through college. After working for more than 2
2) In a qualified merger under Section 34 (c) (2) of the years in X Manufacturing Corporation, Mario decided to retire
Tax Code, the tax basis for computing the capital gains on: and avail of the benefits under the very reasonable retirement
plan maintained by his employer. He planned to invest whatever
(a) the sale of the assets received by the surviving retirement benefits he would receive in a business that will
corporation from the absorbed corporation shall be the provide his employer with the needed raw materials. On the day
original/historical cost of the assets when still in the of his retirement on 30 April 1985, he received P400,000.00 as
hands of the absorbed corporation. retirement benefit. In addition, his endowment insurance policy,
(b) the sale of the shares of the stock received by the for which he was paying an annual premium of P1,520.00 since
stockholders from the surviving corporation shall be 1965, also matured. He was then paid the face value of his
the acquisition/historical cost of assets transferred to insurance policy in the amount of P50,000.00.
the surviving corporation. Is his P50,000.00 insurance proceeds exempt from
income taxation? (#4, 1991 Bar Exams)
----------------------------------------------------------
Suggested Answer:
The P50,000.00 insurance proceeds is not totally

exempt from income tax. The excluded amount is only that
93. Pedro Reyes, an official of Corporation X, asked for
portion which corresponds to the premiums that he had paid
an earlier retirement because he was emigrating to Australia.
since 1965. at the rate of P1,520.00 per year multiplied by
He was paid P2,000,000.00 as separation pay in recognition of
twenty (20) years which was the period of the policy, he will be
his valuable services to the corporation.
subject to report as taxable income the amount of P19,600.00
(Sec. 28, NIRC)
Juan Cruz, another official of the same company, was
separated for occupying a redundant position. He was given
----------------------------------------------------------
P1,000,000.00 as separation pay.
TAX LAW REVIEWER
95. A) Born of a poor family on 14 February 1944, Mario nature of additional compensation income as it is highly doubtful
worked his way through college. After working for more than 2 if municipal governments are authorized to make gifts in
years in X Manufacturing Corporation, Mario decided to retire substantial sums such as this. They are not furthermore gifts of
and avail of the benefits under the very reasonable retirement small value which employers might give to their employees on
plan maintained by his employer. He planned to invest whatever special occasions like Christmas items which could be exempt
retirement benefits he would receive in a business that will under BIR Revenue Audit Memo No. 1-87.
provide his employer with the needed raw materials. On the day
of his retirement on 30 April 1985, he received P400,000.00 as 3) The transportation and representation allowances are
retirement benefit. In addition, his endowment insurance policy, actually reimbursements for expenses incurred by the employee
for which he was paying an annual premium of P1,520.00 since for the employer. Said allowances spent by the employee for the
1965, also matured. He was then paid the face value of his employer are designed to enhance the quality of the service that
insurance policy in the amount of P50,000.00. the employer is supposed to perform for its clientele like people
of the municipality.
Is Marios P400,000.00 retirement benefit subject to ----------------------------------------------------------
income tax?
Suggested Answer:
97. A) Noel Langit and his brother, Jovy, bought a parcel
of land which they registered in their names as pro indiviso
Marios P400,000.00 retirement benefit is subject to
owners (Parcel A). Subsequently, they formed a partnership duly
income tax. To exempt, the retirement pay must have been
registered with Securities and Exchange Commission, which
extended to an employee who is at least 50 years of age and
bought another parcel of land (Parcel B). Both parcels of land
who would worked for at least ten (10) years with the employer.
were sold, realizing a net profit of P1,000,000.00 for parcel A
The amount cannot be considered as a separation pay that
and P500,000.00 for parcel B.
would have exempted benefits from income tax since it was
Mario who had decided to retire instead of being required to do
1) The BIR claims that the sale of parcel A should be
so (Sec. 28, NIRC).
taxed as a sale by an unregistered partnership. Is the BIR
correct?
B) Delstar Emmanuel Perez, a government employee,
retires from the service upon reaching the compulsory
retirement age of 65. would the amount of his entitled to receive
2) The BIR claims also that the sale of parcel B should
by way of commutation of his accumulated leave credits of his
be taxed as a sale by a corporation. Is BIR correct? (#10, 1994
terminal leave pay, be subject to income tax? (#5, 1991 Bar
Bar Exams)
Exams)
Suggested Answer:
Suggested Answer:
1) The BIR is not correct, since there is no showing that
The amount that Emmanuel Perez is to receive should
the acquisition of th property by Noel and Jovy Langit as pro
not be subjected to income tax, and such was the ruling by the
indiviso owners and prior to the formation of the partnership was
Supreme Court in the IN Re Zialcita Administrative Case ( Adm.
used, intended for used, or bears any relation whatsoever to the
Matter No. 90-6015-SC, 18 October 1990). The ruling
pursuit or conduct of the partnership business. The sale of
apparently repudiated, or at least is inconsistent with, its earlier
parcel A shall therefore not be treated as a sale by an
decision in Commissioner vs. Victoriano (G.R. No. 83176, 10
unregistered partnership, but an ordinary sale of the capital
August 1989).
assets, and hence will be subject to the 50% capital gains tax
and documentary stamp tax on transfer of real property, said
---------------------------------------------------------- taxes to be borne equally by the co-owners.
Alternative Answer:
96. In December 1993, the Sangguniang Bayan
The BIR is correct in treating the gain from the sale of
authorized a Christmas bonus of P3,000.00, a cash gift of
parcel A by Noel and Jovy Langit at a profit of P1,000,000.00 in
P5,000.00, and transportation and representation allowance of
the case of Pascual and Dragon v. Commissioner, G.R. No.
P6,000.00 for each of the municipal employees.
78133. October 18, 1988, the Supreme Court ruled that the
sharing of returns does not in itself establish a partnership
1) Is the Christmas bonus subject to any tax?
whether or not the persons sharing therein have a joint or
2) How about the cash gift?
common right or interest in the property. The decision in said
3) How about the transportation and representation
case cannot be applied here because clearly the parties
allowances? (#7, 1994 Bar Exams)
organized a partnership duly registered with the Securities and
Exchange Commission. They pooled their resources together
Suggested Answer:
with the purpose of dividing the profit between them.
1) The Christmas bonus given by the Sangguniang
2) The BIR is correct, since a corporation s defined
Bayan to the municipal employees is taxable as additional
under Section 20 (a) of the Tax Code includes partnerships, no
compensation (Sec. 21 (a) , Tax Code). (See 1997 NIRC)
matter how created or organized except general professional
partnerships. The business partnership in the instant case, shall
2) The cash gift per employee of P5,000.00 being
therefore be taxed in the same manner as a corporation on the
substantial may be considered taxable also. They partake the
sale of parcel B. T he sale shall thus be subject to the credible
TAX LAW REVIEWER
withholding tax under Revenue Regulations 1-90, as amended pursuant to the Condominium Act (R.A. No. 4626, and the
by 12-94, on the sale of parcel B, and the partnership shall purpose of which was merely to vest title to the common areas
report the gain realized from the sale when it files its income tax in favor of the land Condominium Corporation.
return.
There being no monetary consideration, neither is the
conveyance subject to the creditable withholding tax imposed
B) Roberto Ruiz and Condrado dela Cruz bought under Revenue Regulations 1-90, as defined.
three (3) parcels of land from Rodrigo Sabado on May 4, 1976.
Then on 8 July 1977, they bought two parcels of land from The second conveyance was actually no conveyance at all
Miguel Sanchez. In 1988, they sold the first three parcels of land because when the units were sold to the various buyers, the
to Central Realty Inc. In 1989, they sold the two parcels to Jose common areas were already part and parcel of the sale of said
Guerrero. Ruiz and Cruz realized a net profit of P100,000.00 for units pursuant to the Condominium Act. However, the Deed of
the sale in 1988 and P150,000.00 for the sale in 1989. The Conveyance is subject to documentary stamp tax.
corresponding capital gains taxes were individually paid by Ruiz
and Cruz. N.B. Documentary stamps tax and Condominium Law are
excluded from the coverage of the Bar Examinations.
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,
99. Caledonia Aircargo is an off-line international carrier
formed unregistered partnership or joint venture taxable as a
without any flight operations in the Philippines. It has, however,
corporation and that the unregistered partnership was subject to
a liaison office in the Philippines which duly licensed with the
corporate income tax, as distinguished from profits derived from
Securities and Exchange Commission, established for the
the partnership by them which is subject to individual income
purpose of providing passenger and flight information,
tax.
reservation and ticketing services.
Are Robert Ruiz and Conrado Cruz, liable for
Are the revenues of Caledonia Aircargo from tickets
deficiency corporate income tax? (#7, 1991 Bar Exams)
reserved by its Philippine office subject to tax? (#15, 1994 Bar
Exams)
Suggested Answer:
Suggested Answer:
Robert Ruiz and Conrado Cruz are not liable for
corporate income tax. Abandoning evidently the Gatchalian rule,
The revenues in the Philippines of Caledonia Aircargo
the Supreme Court in a recent ruling (Pascuals vs. Court of Tax
as an off-line airline from ticket reservation services are
Appeals, G. R. No. 783133, 18 Oct. 1988), held that isolated
taxable income from whatever source under Sec. 28(a) of the
transactions by two or more persons do not warrant their being
Tax Code. This case is analogous to Commissioner v. BOAC.
considered as unregistered partnership . They will instead be
G.R. No. 65773-74, April 30, 1987 where the Supreme Court
considered as mere co-owners; no corporate income tax is due
ruled that the income received in the Philippines from the sale of
on mere co-ownerships. It was, therefore correct for Ruiz and
tickets by an off-line airline is taxable as income from whatever
Cruz to merely pay their individual income tax liabilities on the
source.
real estate transactions.
---------------------------------------------------------- ----------------------------------------------------------
98. X-land Condominium Corporation was organized by 100. Evelyn is a graduate student of U.P. In January , 1991,
the owners of units in X-land Building in accordance with the she won the Palanca Award for an outstanding short story she
Master Deed with Declaration of Restrictions. The X-land wrote. The award was P25,000.00 in cash. In February, 1991,
Building Corporation, the developer of the building, conveyed she was also named most Valuable Player of the Varsity
the common areas in favor of the X-land Condominium volleyball team and she was given a trophy plus P10,000.00 .
Corporation. Finally, In March ,1991, she received a Fellowship Award from
the University of California to pursue a masters degree in
Is the conveyance subject to any tax? (#12, 1994 Bar American literature. The fellowship is for $10,000.00 plus free
Exams) board and lodging for two (2) semesters. Should Evelyn include
these awards and fellowship in her gross income? Reasons.
Suggested Answer: (#20, 1993 Bar Exams)
The conveyance is not subject to any tax. The same as Suggested Answer:
without consideration and not in connection with a sale made to
X-land Condominium Corporation, and the purpose of the Gross income includes prizes and winnings (Section
conveyance to the latter is for the management of the common 27 of the National Internal Revenue Code [NIRC], except
areas for the common benefit of the unit owners. those stated in Section 28 B.(8),(E) of the NIRC, to wit:
The same is not subject to income tax since no income

was realized as a result of the conveyance, which was made
TAX LAW REVIEWER
(e) Prizes and awards made primarily in recognition of ----------------------------------------------------------

religious, charitable, scientific, educational, artistic, literary, or
civic achievement but only if:
101. What are:
(i) The recipient was selected without any
action on his part to enter the contest
1) Disguised dividends in income taxation? Give an
or proceeding: an
example.
2) Vanishing deductions in estate taxation? (# 1, 1994
(ii) The recipients is not required to
Bar Exams)
rendered substantial future services as
a condition to receiving the prize or
Suggested Answer:
award.
1) Disguised dividends are those income payments
The first award granted to Evelyn was a Palanca award.
made by a domestic corporation. Which is subsidiary of a non-
This kind of award erquires submission of literary works. Hence,
resident foreign corporation, to the latter ostensibly for serviced
this is included in the gross income because it fails to meet the
rendered by the latter to the former, but which payments are
legal requisites provided for in the aforeqouted provisions of law
disproportionately larger than the actual value of the services
specifically item (i).
rendered. In such case, the amount over and above the true
value of the service rendered shall be treated as a dividend, and
The second award granted to Evelyn was the Most Valuable
shall be subjected to the corresponding tax of 35% on the
Player Award. In this kind of award, Evelyn did not file any
Philippine source gross income, or such other preferential rate
application to enter into any contest. The award was given to
as may be provided under a corresponding Tax Treaty.
her in recognition for her outstanding performance in the field of
sports. However, the recognition in the field of sports is not
Example: Royalty payment under a corresponding
among those stated in the aforequoted provision of law. Thus,
licensing agreement.
the award granted to her does fall under the aforequoted
provision of law.
2) Vanishing deductions or property previously taxed in
estate taxation refers to the diminishing deductibility/exemption,
The last award granted to her the Fellowship Award. This
at the rate of 20% over a period of five (5) years until it is lost
requires also submission of application to qualify for such
after the fifth year of any property (situated in the Philippines)
award. Hence, it fails to meet the necessary requisites of the
forming part of the gross estate acquired by the decedent from a
aforequoted provision of law specifically item (i).
prior decedent who died within a period of five (5) years from the
decedents death.
a) The award of P25,000.00 should be included in Evelyns ----------------------------------------------------------

gross income for while it was earned as a prize for literary
achievement. It cannot be said that she won without any action
on her part to enter the contest. Her P10,000.00 prize as Most
Valuable Player cannot be excluded for the same reason. Both
102. Maribel Santos, a retired public school teacher, relies
awards, however, may be considered income subject to income
on her pension from the GSIS and the interest income from a
tax.
time deposit of P500,000.00 with the ABC Bank.
The fellowship award of $10,000.00 is, however, excluded Is Maribel Santos liable to pay any tax on her income?
from her income as she was selected therefor without any action (#13, 1994 Bar Exams)
on her part and the same was given to her in recognition of
literary and educational achievement, presumably without her Suggested Answer:
being required to render future services for the grantor.
Maribel Santos is exempt from tax on the pension
b) It depends. Section 28 (b)(8,E) of the NIRC enumerates from the GSIS (Sec. 28 (b)(7)(F), Tax Code). However, as
the requirements in order to exclude the item from taxation. The regards her time deposit, the interest she receives thereon is
Tax Code requires that the prizes and awards are given subject to 20% final withholding tax. (Sec. 21(a)(c), Tax Code).
primarily in recognition of religious, charitable, scientific,
educational, artistic, literary or civic achievements. The awards ----------------------------------------------------------
mentioned were given to the taxpayer in recognition on 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.
103. 1) Bates Advertising Company is a non-resident
corporation duly organized and existing under the laws of
Section 28(b) further requires that the recipients must be
Singapore. It is not doing business and has no office in the
selected without any action on his part to enter the contest or
Philippines. Pilipinas Garment Incorporated, a domestic
proceeding and the taxpayer-recipient is not required to render
corporation retained the services of Bates to do all the
substantial future services as a condition to receiving the prize
advertising of its products abroad. For said services, Bates fees
or award. If these two requirements are met, then the items
are paid through outward remittances.
should not be included in the gross income.
TAX LAW REVIEWER
Are fees received by Bates subject to any withholding of real properties consummated on or after 1 January 1990
tax? (#18, 1994 Bar Exams) (BIR Ruling 040-91). The 6% interest on the just compensation
is not in the nature of an interest on Philippine currency bank
Suggested Answer: deposit and yield or any other monetary benefit from deposit
substitutes from trust fund and similar arrangements, the same
The fees paid to Bates Advertising Co., a non-resident is not subject to the 20% final withholding tax under Sec. 21 of
foreing corporation are not subject to withholding tax since they the NIRC (BIR Ruling 040-91).
are not subject to Philippine tax. They are exempt because they
do not constitute income from Philippine sources, the same 3) Pacific, Inc is engaged in overseas shipping. It time
being compensation for labor or personal services performed chartered one of its ships to a Japanese company on a five-year
outside the Phiippines (Sec. 36(c)(3) and Sec. 25(b)(1), Tax term. The charter was consummated through the efforts of
Code). Kamino Moto, atokyo based broker. The negotiation took place
in Tokyo. The agreement calls for Pacific, Inc. to pay Kamino
2) X owns a half-hectare property in Bacoor, Cavite which in Moto $50,000.00. Your opinion is sought whether Pacific, Inc
1980 was expropriated by the national government, through the should withhold the tax before sending the compensation of
Department of Public Works and Highways. After ten years, X Kamino Moto. (#15, 1993 Bar Exams)
was paid P2,000,000.00 as just compensation plus 6% annual
interest by the DPWH but minus the withholding tax. Is the Suggested Answer:
action of DPWH proper? Reasons. (#5, 1993 Bar Exams)
The compensation of Kamino Moto is not subject to
Suggested Answer: withholding tax. Compensation for labor or personal services
performed outside the Philippines are considered as income
No, the action of DPWH is not proper. from sources without the Philippines (sec. 36(c)(3) and (a)(3).
Kamino Motos efforts in consuming the Charter is a form of
In the case of Province of Tayabas vs. Perez Phil. 467 labor or services.
just compensation was defined as :the just and complete
equivalent of the loss which the owner of a thing expropriated Considering further than Kamino Moto is a Tokyo
has to suffer by reason of the expropriation. based broker, presumably a non-resident foreign corporation, it
is taxable only on income within the Philippines. Since, the
Further, in BIR Ruling 61-91 just compensation was contract was consummated in Japan, Kamino Motos
defined as that which is paid by the Government equivalent to compensation, therefore, is not subject to withholding tax.
the value of the property at the time of its taking. It is the fair and
full equivalent for the indemnity. Alternative Answers:
Based in the foregoing it is clear therefore that the a) Taxes should not be withheld at the income was
amount received after 10 years as just compensation is not in derived from an activity outside the country and, therefore, from
any way a profit, gain or income on the part of X. in the same sources outside the Philippines. It has been held in
vein, the 6% annual interest paid by DPWH is not income. The Commissioner v. Japan Air Lines, 202 SCRA 450 that for the
same partakes of the nature of a penalty or indemnity due and source of income to be considered as coming from the
accruing to X for having been deprived of the use and benefit by Philippines, it is sufficient that the income is derived from
not being paid of the fair market value of the property since its activities within the country. The time chartering of the ship
taking 10 years ago. Hence, the DPWH should not have occurred outside the Philippine territory. Therefore, income
withheld taxes. derived therefrom is not subject to income taxes that may be
withheld at source.
Alternative Answer:
b) Kamino Moto is non-resident alien not engaged in
a) No. the withholding tax (presumably on capital trade or business in the Philippines. According to Section 25 of
gains) should have been based on the fair market value of the the NIRC, he is liable to pay income tax if the compensation
property at the time of the expropriation. Thus, in this case, for paid by Pacific is compensation income derived from the
purposes of computing the withholding tax on capital gains, the sources within the Philippines. However, the brokerage service
amount representing the 6% annual interest should have been of Kamino Moto was rendered in Tokyo. Applying the source-
excluded from the withholding tax base. rule in Section 36 of the NIRC, the income derived by the
taxpayer is income derived from sources outside the Philippines.
b) No. With respect to capital gains on sales of realty to the Thus, the compensation of Kamino Moto is not subject to
government, X may elect to include the same in his gross Philippine income tax. Pacific Inc. should not withhold income
compensation income or to pay the corresponding capital gains tax on the payment.
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.
Assuming the property is an ordinary asset, the expropriation

proceedings in 1980 is not subject to the creditable withholding
104. Four Catholic parishes hired the services of Frank
tax Revenue Regulations Nos. 12-89 and 1-90 implementing
Binatra, a foreign non-resident entertainer, to perform for four (4)
Section 50 (b) of the NIRC, the transfer of the property was
nights at the Folk Arts Theater. Binatra was paid P200,000.00 a
effected in 1980. the above mentioned revenue rules and
night. The Parishes earned of P1,000,000.00 which they used
regulations are applicable only to sales, exchange or transfers
for the support of the orphans in the city.
TAX LAW REVIEWER
106. 1) The Filipinas Hospital for Crippled Children is a

Is the income of Frank Binatra taxable? (#19, 1994 charitable organization. X visited the hospital, on his birthday, as
Bar Exams) was his custom. He gave P100,000.00 to the hospital and
P5,000.00 to a crippled girl whom he particularly pitied. A
Suggested Answer: crippled son of X is in the hospital as of its patients. X wants to
exclude both the P100,000.00 and the P5,000.00 from his gross
The income of Frank Binatra, a non-resident alien income. Discuss. (#2, 1993 Bar Exams)
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 Suggested Answer:
engaged in any trade or business in the Philippines.Tariff and
Customs Under Sec. 29(h) (1) 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
105. X is the Advertising Manager of Mang Douglas
educational purposes or of rehabilitation of veterans or to social
Hamburger, Inc. X had dinner with Y, owner of a chain of
welfare institutions no part of which inures to the benefit of any
restaurants, to convince the latter to carry Mang Douglas
private individual;
Hamburger. After Y agreed, both X and Y went their separate
ways. X celebrated by going to singles bar. He picked up a
b. made within the taxable year;
partner and consumed a bottle of beer. He drove home at 3:00
a.m.. on his ways, he sideswiped a pedestrian who died as a
c. not more than 6% (for individuals) of 3% (for
result of the accident. X settled the case extrajudicially by
corporations) of the taxpayers taxable income to be computed
paying the heirs of the pedestrian P50,000.00. the money,
without including the contribution.
however, came to Mang Douglas Hamburger, Inc. Discuss
whether the P50,000.00 can be claimed by Mang Douglas
Applying the above-provisions of law to the case at bar, it is
Hamburger, Inc. as an ordinary and necessary expenses. (#1,
clear therefore that only the P100,000.00 contribution of X to
1993 Bar Exams)
Filipinas Hospital for Crippled Children qualified as a deductible
contribution.
Suggested Answer:
Sec. 29(h)(1) of the NIRC expressly provides that the same
No. as the expenditure had not been incurred in carrying on
must be actually paid to a charitable organization to be
his trade or business, the same cannot be considered an
deductible. Note that the law accorded no privilege to similar
ordinary and necessary expense for which deduction may can
contributions extended to private individuals. Hence, the
claimed. Such expense is a personal expense which is not
P5,000.00 contribution to the crippled girl cannot be claimed as
deductible from the gross income.
a deduction.
Alternative Answer:
Alternative Answer:
a) In the case of Helvering vs. Humpton[1935; CCA 9 th
a) The P100,000.00 donation may properly be
79F[2d]358], it was held that:
deducted from Xs gross income, but not the P5,000.00 donated
to the crippled girl, as charitable and other contributions that
Restitution is ordinary expected to be made by a person in
may be deducted from taxable income do not contemplate those
the course of whose business a wrong is committed, so that he
given to individuals. While it may be that Xs son is a patient in
may deduct the amount thereof as an ordinary and necessary
the hospital, it cannot be said that part of its net income inures
business expenses.
to the benefit of X as to be disallowed as a deduction from
taxable income.
In the case at bar, the money advanced by Mang Douglas
Hamburger Inc. to pay off the civic liability of X, which arose
b) Assuming X is a self-employed individuals, he may
from the accident after a business deal has been struck for
not deduct the donations made because under Sec. 29 of the
Mang Douglas Hamburger Inc. was in fact reparation/restitution
NIRC as amended by RA 7496 better known as SNITS, only
to the aggrieved heirs. However, the same cannot be
contribution to the government or to an accredited relief
considered as an ordinary and deductible expense, since the
organization for the rehabilitation of calamity stricken areas
law poses as a condition for its deductibility that the wrong or
declared by the President may be deducted for income tax
tort should have been committed in the course of the business.
purposes. Clearly, the donees do not qualify as relief
organizations.
b) If Mang Douglas Hamburger, Inc. treats the advances as
salary or compensation of Y who is an employee of Mang
Assuming X is receiving purely compensation income,
Douglas and withholds the corresponding tax thereon then there
he can only deduct from gross compensation income personal
is a possibility of deducting.
exemption, additional personal exemption and special additional
exemption(Section 29, NIRC as amended).
----------------------------------------------------------
2) Xs favorite charity organization is the Philippine

National Red Cross. To raise money, PNRC sponsored concert
TAX LAW REVIEWER
featuring the Austira Boys Choir. X advanced P100,000.00 to Suggested Answer:

the PNRC for which he was issued a promissory note. Before its
maturity, X cancelled and return the note to PNRC. An Sec. 29 of the National Internal Revenue Code on
advertising man, X also undertook the promotions of the Autria deductions, among other things provides:
Boys Choir. Part of the promotions campaign was to ask
prominent personalities to publicly donated blood to the PNRC a
(a) Expenses
day before the concert. X himself donated 100 cc of blood. X
intends to claims as deductions the value of the note, the cash
(1) Business Expenses (a) In general- All the ordinary
value of the promotions campaign and the cash value of the
and necessary expenses paid or incurred during the taxable
blood he donated. Give your legal advice. (#10, 1993 Bar
year in carrying on any trade or business, including a
Exams)
reasonable allowance for salaries or other compensation for
personal services actually rendered; traveling expenses while
Suggested Answer:
away from home in the pursuit of trade, profession or business;
rentals or other payments required to be made as a condition to
The value of the note can be claimed as deduction as
the continued use or possession, for the purpose of the trade,
charitable contribution. While the amount was originally a loan, it
profession or business of property to which the taxpayer has not
can be considered to have become a gift or contribution when X
taking title or in which he has no equity.
cancelled and returned the note to PNRC, a charitable
organization.
Further, Sec. 69 of Revenue Regulations No. 2, as
amended, otherwise known as Income Tax Regulations reads:
On the other hand, the cash value of the promotions
campaign cannot be claimed as deduction. Advertising
Sec. 69. Professional Expenses-A professional may
expenses can only be deducted from the revenues where the
claim as deductions the cost of supplies used by him or in the
expenses was incurred. In the case at hand, PNRC is the
practice of his profession, expenses paid in the operation and
revenue-producing entity not X. X did not derive any revenue.
repair of transportation equipment used in making professional
Thus, the cash value of his promotions campaign cannot be
calls, dues to professional societies and subscriptions to
claimed as deduction.
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
a) The value of the note qualifies s a contribution to a
equipment, the use of life of which is short, may be deducted.
charitable institution which may be deducted from gross income
But amounts expended for books, furniture and professional
but only to the extent that it does not exceed 6% of his taxable
instruments and equipment of the permanent character are not
income derived from business.
allowable deductions.
X cannot claim deductions for the other items.
From the foregoing provisions of law that ordinary and
Charitable and other contributions, to be deductible, must
necessary expenses incurred during a taxable year pertaining
actually have been paid, which is not true of the value of the
directly to the practice of a profession may be allowed as
advertising promotions and must represent some economic
deductions, it may be inferred from a keen reading of Sec. 69 of
benefit to the recipient, which is not true of the blood donation.
Revenue Regulations No. 2 that aside from personal
exemptions, only direct costs or overhead expenses incurred in
b) Section 29 as amended by RA 7496 allows the
the actual practice of a profession may be claimed ,i.e. supplies,
deduction of the donation to an accredited relief organization for
fuel, light, electricity, salary, etc.
the rehabilitation of the calamity stricken areas declared by the
President. Clearly, the PNRC will qualify as donee relief
Applying the above considerations in the case at bar,
organization. The P100,000.00 note may allowed to the extent
it appears that among the expenses incurred by X, only the
of its cash value considering that the maker of the note is the
premiums he paid for malpractice insurance qualifies as a
donee itself. The rule is, donation made in kind shall be
deductible expense, the same being as ordinary and necessary
determined at its fair market value as of the date such donations
expense in the pursuit of a profession as defined by Revenue
or gifts are made. (Section 10 BIR-NEDA Regulation 1-81) The
Regulations No. 2. The tuition fees for pre-bar classes and the
services rendered by the taxpayer to promote the show and the
bar examination fees paid to the Supreme Court by X do not
100 cc blood may not be allowed because of the difficulty in
qualify as deductible expenses under Revenue Regulations No.
getting the fair-market value of these non-cash donations.
2. As for the amount spent by X to entertain the judge who
decide his first case, the same may not be claimed as an
----------------------------------------------------------
expenses. A business expense to be deductible must be
sustained by adequate proof and that the same must be against
the law or public policy (Consolidated Mines, Inc. vs. Court of
107. X just hurdled the bar examinations and immediately Tax Appeals. L-18863 29 August 1974).
engaged in the practice of law. In preparing his income tax
return, he listed the following as deductible items: (a) fees paid Moreover, it may worthwhile to note that under Sec. 3
to the Supreme Court to be able to take the bar examinations; (B) of Revenue Regulations No. 2-93, implementing RA No.
(b) fees paid to a law school to enroll in its pre-bar review 7496, otherwise known as An Act Adopting The Simplified Net
classes; (c) malpractice insurance and (d) amount spent to Income Taxation Scheme for the Practice Of Their Profession,
entertain a judge who decide his first case. Which deductions amending the Section 21 and 29 of the National Internal
are allowable: Reasons. (# 3, 1993 Bar Exams) Revenue Code, as amended only the following direct costs are
deductible:
TAX LAW REVIEWER
On November 10, 1986, the taxpayer filed an

a. Raw materials amended income tax return for the same calendar year 1985,
claiming therein an additional deduction in the amount of P20,
b. Salaries of employees directly performing services 400. 00 representing interest paid on the donors gift tax.
for the taxpayer in the course of or pursuant to his business or
practice of his profession. This includes salaries and wages paid A claim for refund of alleged overpaid income tax for
for janitorial, security, bookkeeping, administrative and sales 1985 was filed with the Commissioner which was subsequently
personnel, by a self-employed taxpayer or a professional in the denied.
exercise of his profession;
Upon appeal with the Court of Tax Appeals, the
c. telecommunication, electricity, fuel, light and water; Commissioner took issue with the Court of Tax of Appeals
determination that the amount paid by the taxpayer for interest
d. business rental; on his delinquent taxes is deductible from the gross income for
the same year pursuant to Sec. 29 (b)(1) of the National
e. depreciation; Revenue Code.
f. contribution made to the Government and The Commissioner of Internal Revenue pointed out
accredited relief organizations for the rehabilitation of calamity- that a tax is not a indebtedness. He argued that there is a
stricken areas declared by the President. fundamental distinction between a tax and a debt. According
to the Commissioner, the deductibility of interest on
The deductibility of the contributions is based on two indebtedness from a persons income tax cannot extend to
accredited criterias, to wit: interest on taxes.
i. The donee or recipient must be the government or 1) What is your opinion on the argument of the
accredited relief organization; and Commissioner that a tax is not a indebtedness so that
deductibility on taxes should not be allowed? (#10, 1992 Bar
ii.The contribution must be utilized for the Exams)
rehabilitation of calamity-stricken areas declared by the
President. Suggested Answer:
The term Government as used in the law refers to The Commissioners argument is misplaced because
the Philippines or any of its agencies or political subdivisions the interest on the donors tax is not one that can be considered
and includes: as having incurred in connection with the taxpayers trade,
business or exercise of profession.
i. Departments, agencies, bureaus, commissions and
authorities, including state colleges and universities: Alternative Answer:
ii. Autonomous regions, provincial, city or municipal a) While a tax may be considered a debt for purposes of
governments; deducting from gross income, the interest on taxes cannot be so
considered, as such interest is in the nature of a penalty, the
g. Interest paid or accrued within a taxable year on imposition of which is designed to discouraged delinquent
loans contracted from accredited financial institutions which payment of taxes. To allow the e deductibility of such interest
must be proven to have been paid or incurred in connection with would be to diminished the punitive and deterrent effects of the
the conduct of a taxpayers profession, trade or business. imposition, and thus to diminish the importance of the prompt
payment of taxes.
Alternative Answer:
b) The argument of the Commissioner is wrong.
None of these expenses are allowable. With respect Because while a tax as a general rule is not a debt, interest on a
to individuals engaged in the practice of a profession, the NIRC non-payment of a tax has been considered like interest on
limits deductions only to direct costs incurred in the exercise of indebtedness by the Supreme Court. ( Note: Whether or not the
the profession, which costs do not include the items being interest is deductible under the present law is not apparently in
claimed by X. question).
---------------------------------------------------------- 2) Distinguish between the legal concept of taxes

and debt. (#10, 1992 Bar Exams)
108. Sometime in December 1980, a taxpayer donated to
Suggested Answer:
his son 3,000 shares of stock of San Miguel Corporation. For
failure to file a donors return on the donation within the statutory
A tax may be considered a debt in the Civil Code
period, the taxpayer was assessed the sum of P102,000.00, as
sense for the following purposes:
donors tax plus 25% surcharge of P25,500.00 and 20% interest
or P20,400.00 2hich he paid on June 24, 1985.
a) Collection being enforced by court action;
b) Statute of limitations ; and
On April 10, 1986, he filed his income tax return for
c) Deduction from gross income.
1985 claiming among others, a deduction for interest amounting
to P9,500.00 and reported a taxable income of P96,000.00.
TAX LAW REVIEWER
Strictly speaking, however, a tax is not a debt that Therefore based on the foregoing considerations, the
there can be no set-off between the taxpayer and the benefits subject in the case at bar, not expressly exempted by
Government. law, are considered as income.
3) Pursuant to the National Internal Revenue Code,

for interest to be deductible, what are the requirements to be
----------------------------------------------------------
met? Explain.
Suggested Answer:
110. X is a traveling salesman in Jolo, Sulu. In the course
For interest to be deductible, the following of his travel, a band of MNLF seized his car by force and used it
requirements must be met: to kidnap a foreign missionary. The next day, X learned that the
military and the MNLF band had a chance encounter. Using
a) That there must-be an indebtedness; heavy weapons, the military fired at the MNLF band that tried to
escape with the use of Xs car. All the members of the band died
b) That there is an interest on such indebtedness; and Xs car was a total wreck. Can X deduct the value of his car
from his income as casualty loss? Reasons. (#6, 1993 Bar
c) Such interest was paid or accrued within the Exams)
taxable year;
Suggested Answer:
d) Interest was paid on a debt related to ones
profession, trade or business. Sec. 29(i)(c) of the National Internal Revenue Code
provides that in cases of the individual taxpayers, losses to be
deductible must be:
----------------------------------------------------------
a) actually sustained and charged off within the taxable
year;
109. The employees of Travellers, Inc. staged a strike. X , a
non-union member joined the strike and volunteered to picket b) have been incurred in the trade, profession or
the company premises from 8:00 A.M. to 12:00 P.M., Monday to business or in any transaction entered into for profit, though not
Friday. Six months into the strike, X ran out of money and connected with trade, profession or business;
assked financial aid from the union since he has no other source
of income and needed financial assistance in order to live. The c) evidenced by a closed and complete transaction.
union gave him P1,000.00 a month to take care of his food Moreover, Sec. 1 of Revenue Regulations No. 12-77, defined
requirements plus P500.00 to take care of his monthly rent. casualty as complete or partial destruction of property resulting
When X filed his return, he excluded these benefits from his from an identifiable event of sudden, unexpected, or unusual
gross income. The exclusion was denied by the BIR. Decide. nature. It denotes accidents, some sudden invasion by hostile
(#4, 1993 Bar Exams) agency, and excludes progressive deterioration.
Suggested Answer: Based on the above-mentioned laws and the circumstances

of the case at the bar, the value of the wrecked car is deductible
The P1,500.00 is not compensation income because as casualty loss, provided the regulations governing
compensation income arises out employer-employee substantiation requirements for losses are complied with.
relationship as payment for services without compensation. The
P1,500.00 is a gift from the labor union. According to Section 28 Alternative Answers:
(b)(3) of the NIRC, gifts are be excluded from gross income.
Thus, the BIRs denial is not valid. a) No. With respect to individuals engaged in
business, the NIRC limits deductions only to certain direct costs
Alternative Answer: incurred in connection with the business, which costs, however,
do not include casualty losses.
Under the law, gross income consists of all gains,
profits, and income of the taxpayer during a taxable year of b) No. Section 29 of NIRC, as amended by RA 7496,
whatever form derived from any source, whether legal or illegal, better known as SNITS, does not include among allowable
except items of gross income subject to final income tax and items of deductions for self-employed individuals like X, casualty
income exempt from taxation under Sec. 28(b) of the NIRC. losses even if the property destroyed is used in business. A
taxpayer claiming deduction must point to some specific
Moreover, in the case of Guitierrez vs. Collector of provision of the statute in which that deduction is authorized and
Internal Revenue, CTA Case No. 65, 31 August 1965, it was must be able to prove that is entitled to the deduction which the
held that the phrase income from whatever source derived law allows (Atlas Consolidated Mining, 102 SCRA 246).
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
gains.
111. 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
TAX LAW REVIEWER
room is P300.00 a month. X wants your opinion on whether BIR the director is a bribe given to a government employee. Bribery
can tax the value of the free use of his room. (#11, 1993 Bar is a crime punishable under the Revised Penal Code.
Exams)
Suggested 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 B. Estate Tax
the lodging is furnished in the business premises of the
employer and the employee is required to accept such lodging 113. Discuss the rule on situs of taxation with respect to the
as a condition of his employment, then the value of said lodging imposition of the estate tax on property left behind by a
will be not taxable. It is merely for the convenience, comfort and non-resident decedent. (#15a, 2000 Bar Exams)
pleasure of the employer.
Alternative Answer: Suggested Answer:

The value of the gross estate of a non-resident
a) The BIR may not tax the value of the free use of the decedent who is a Filipino citizen at the time of his death shall
room, as the same may not strictly be considered compensation be determined by including the value at the time of his death of
income. Considering the nature of Xs employment and the fact all property, real or personal, tangible or intangible, wherever
that the free lodging was furnished within the business situated to the extent of the interest therein of the decedent at
premises, it may reasonably be said that the benefit therefrom the time of his death (Sec. 85 A, NIRC of 1997). These
inured to the employer more than to X and thus may not actually properties shall have a situs of taxation in the Philippines hence
be considered renumeration for services included in the subject to Philippine estate tax.
computation of the taxable income. 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
b) It depends. If the lodging furnished to employee X Philippines, only that part of the entire gross estate which is
is within the business premises of the employer and the situated in the Philippines to the extent of the interest therein of
employee is required to accept the lodging as condition for the decedent at the time of his death shall be included in his
employment the imputed rental value of the room used by X taxable estate. Provided, that, with respect to intangible
shall be excluded from Xs compensation income (BIR Audit personal property, we apply the rule of reciprocity.
Memo 1-87).
----------------------------------------------------------
----------------------------------------------------------
114. Mr. Felix dela Cruz, a bachelor resident citizen,

112. X is the proprietor of Vanguard, which is a security suffered from a heart attack while on a business trip to the
and detective agency. X was able to get the contract to provide USA. He died intestate on June 15, 2000 in New York City,
the security services of a government agency. He signed the leaving behind real properties situated in New York; his
Security Agreement with the director of the government agency family home in Makati City; shares of stocks in San Miguel
calling for the deployment of 100 security guards on a 24 hour Corporation; cash in bank; and personal belongings. The
basis. The contract was revocable at the will of the director. To decedent is heavily insured with Insular Life. He had no
please the director, X gives him at the end of the month known debts at the time of his death. As the sole heir and
P100,000.00 per guard hired. May X deduct from his income the appointed Administrator, how would you determine the
money he paid to the director? Reasons. (#12, 1993 Bar gross estate of the decedent? What deductions may be
Exams) claimed by the estate and when and where shall the return
be filed and estate tax paid? (#15b, 2000 Bar Exams)
Suggested Answer:
The money paid to please the director is not Suggested Answer:

deductible. This is a form of bribery. Deductions shall not be The gross estate shall be determined by including the
allowed if the expense is contrary to law, public policy or for value at the time of his death all of the properties mentioned to
immortal purposes. (Zamora vs. Collector, SCRA 163; Roxas vs. the extent of the interest he had at the time of his death because
CTA SCRA 276). he is a Filipino citizen. (Sec. 85A, NIRC of 1997)
With respect to the life insurance proceeds, the
Alternative Answers: amount includible in the gross estate for Philippine tax purposes
would be to the extent of the amount receivable by the estate of
a) No. The money given to the director was paid the deceased, his executor, or administrator, under policies
merely to please him and was not paid for services actually taken out by decedent upon his own life, irrespective of whether
rendered and therefore does not qualify as compensation for or not the insured retained the power of revocation, or to the
services deductible as ordinary and necessary expense. extent of the amount receivable by any beneficiary designated in
Moreover, deductions are allowable only if incurred for legal the policy of insurance, except when it is expressly stipulated
purposes. that the designation of the beneficiary is irrevocable. (Sec. 85E
NIRC of 1997)
b) No. A taxpayer may not deduct a business expense The deductions that may be claimed by the estate are:
which is against the law or public policy. The payment made to
TAX LAW REVIEWER
1. The actual funeral expenses or in an amount equal to five Suggested Answer:

percent of the gross estate, whichever is lower, but in no
No. This expense will not fall under any of the
case to exceed P200,000 (Sec. 86A(1) NIRC of 1997)
allowable deductions from gross estate. Whether viewed
2. The judicial expenses in the testate or intestate
in the context of either funeral expenses or medical
proceedings (Sec. 86A(1) NIRC of 1997)
expenses, the same will not qualify as deduction. Funeral
3. That value of the decedents family home located in Valle
expenses may include medical expenses incurred to
Verde Pasig City in an amount not exceeding one million
commemorate the death anniversary. (De Guzman v De
pesos, and upon presentation of a certification of the
Guzman 83 SCRA 256). Medical expenses, on the other
barangay captain of the locality that the same have been
hand, are allowed only if incurred by the decedent within
the decedents family home. (Sec. 86A(4) NIRC of 1997)
one year prior to his death. (Sec. 86 A6, NIRC)
4. The standard deduction of P1,000,000. (Sec. 86A(5) NIRC
of 1997)
5. Medical expenses incurred within one year from death in
----------------------------------------------------------
an amount not exceeding P500,000. (Sec. 86A(6) NIRC of
1997)
The estate tax return shall be filed within six (6)
months from the decedents death (Sec. 90 (B) NIRC of 1997), 117. Is the BIR authorized to collect estate tax deficiency
provided that the CIR shall have authority to grant in meritorious through the summary remedy of levying upon and sale of real
cases, a reasonable extension not exceeding thirty (30) days for properties of a decedent without first securing the authority of
filing the return. (Sec. 90C NIRC of 1997) the court sitting in probate over the supposed will of the
Except in cases where the CIR otherwise permits, the decedent? (#8, 1998 Bar Exams)
estate tax return shall be filed with an authorized agent bank, or
Revenue District Officer, Collection Officer, or duly authorized Suggested Answer:
Treasure of Pasig City, the City in which the decedent was
domiciled at the time of his death. (Sec. 90(D) NIRC of 1997) Yes. The BIR is authorized to collect estate tax
---------------------------------------------------------- deficiency through the summary remedy of the levying upon and
sale of 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 the non claims, and this is justified
115. A, aged 90 years and suffering from incurable cancer, by the necessity of the government finding, immortalized in the
on August 1, 2001 wrote a will and, on the same day, made maxim that taxes are the lifeblood of the government (Marcos v.
several inter-vivos gifts to his children. Ten days later, he CIR. G.R. No. 120880, June 5, 1997).
died. In your opinion, are the inter-vivos gifts considered
transfers in contemplation of death for purposes of Alternative Answer:
determining properties to be included in the gross estate?
Explain your answer. (#15, 2001 Bar Exams) 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
Suggested Answer: mandatory requirement for the collection of the estate tax.
Yes. When the donor makes his will within a short
The probate court is determining issues which are not
time of, or simultaneously with, the making of gifts, the gifts
against the property of the decedent, or a claim against the
are considered as having been made in contemplation of
estate as such, but is against the interest or property right which
death (Roces v Posadas, 58 Phil 108). Obviously, the
the heir, legatee, devisee, etc. has in the property formerly held
intention of the donor in making the inter-vivos gifts is to
by the decedent. (Marcos v. CIR. G.R. No. 120880, June 5,
avoid the imposition of the estate tax and since the donees
1997).
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 As gross estate.
---------------------------------------------------------- 118. On September 10, 1991, A Bank Manager of peoples

Bank, Inc. (PBI), upon reading an obituary announcing the death
of Mr. Roberto Diaz refused to allow one of his heirs to withdraw
116. On the first anniversary of the death of Y, his heirs Mr. Diaz deposit amounting to P2 Million.
hosted a sumptuous dinner for his doctors, nurses and
others who attended his last illness. The cost of the dinner A week later, immediately following said denial, the
amounted to P50,000. Compared to his gross estate, the administrator of the estate sued the Bank/Bank Manager to
P50,000 did not exceed five percent of the estate. Is the compel them to release the money since such act was arbitrary
cost of the dinner to commemorate his one-year and constituted a denial of property/constitutional rights.
anniversary deductible from his gross estate? Explain your
answer. (#16, 2001 Bar Exams) 1. If you are retained as counsel by the Bank/Bank
Manager to defend their stand in refusing to release the P2
TAX LAW REVIEWER
Million to the heirs, what would you raise as a legal defense? be taxed for estate tax purposes the theory being that the
Discuss. (#6, 1992 Bar Exams) transferors control thereon extends up to the time of his death.
I would raise the defense that under Sec 90 of the 1. Donations inter vivos are not subject to estate taxes
NIRC, a bank with knowledge of the death of a person who because the transfer of the property take effect during the
maintains a deposit account with such bank shall allow lifetime of the donor. The transfer is therefore subject to the
withdrawal therefrom only if the mandatory requirement of a donors tax.
certification from the Commissioner that the taxes due thereon
have been paid could be presented by an heir. Absent such On the other hand, donations mortis causa are subject to estate
certification, a bank is authorized to withhold the release of taxes since the transfer of the properties takes effect after the
deposits of a decedent. death of the decedent. Such donated properties, real or
personal, tangible or intangible, shall form part of the gross
2. Under the same set of cats, would you, as administrator of estate.
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. (#6, 1992 Bar Exams)
Suggested Answer:
120. 1) Jose Ortiz owns 100 hectares of agricultural land
planted to coconut trees. He decided on May 30, 1994. prior to
An administrative appeal to the Commissioner of
his death, the government, by operation of law, acquired under
Internal Revenue would not be a proper remedy without an
the Comprehensive Agrarian Reform Law all his agricultural
original proceeding having first been filed with the BIR.
lands except five (5) hectares. Upon the death of Ortiz, his
widow asked you how she will consider the 100 hectares of
A petition for review with the Court of Tax Appeals, on
agricultural land in the preparation of the estate tax return.
the other hand, requires a final decision of the Commissioner,
the CTA being a court of exclusive appellate jurisdiction.
What advice will you give her? (#11, 1994 Bar Exams)
As administrator, I would cause the payment of the
2) Cliff Robertson, an American citizen, was
proper taxes on the deposits and thereafter, secure the required
permanent resident of the Philippines. He died in Miami, Florida.
certification from the commissioner.
He left 10,000 shares to Meralco, a condominium unit at the
Twin Towers Building at Pasig, Metro Manila and a house and
3. if the Commissioner of Internal Revenue allows the
lot in Los Angeles, California.
administrator of the estate or the heirs of the decedent to
withdraw from the deposit account, what are the conditions
What assets shall be included in the Estate Tax
under the Tax code which have to be met first?
Return to be filed with the BIR? (#20, 1994 Bar Exams)
Suggested Answer:
Suggested Answer:
Before withdrawals on deposits of a decedent could
1) The 100 hectares of land that Jose Ortiz owned but
be permitted, the proper taxes should first be paid and a
which prior to his death on May 30, 1994 were acquired by the
certification of such payment secured from the Commissioner.
government under CARP are no longer part of his taxable gross
However, the Commissioner may authorize the withdrawal
estate, with the exception of the remaining five (5) part of
without a certification provided the amount to be withdrawn shall
decedents interest.
not exceed P10,000.00
2) All of Mr. Robertsons assets consisting 10,000 shares in
Alternative Answer:
the Meralco, acondominium unit in PAsig, and his house and lot
in Loss Angeles, California are taxable. The properties wherever
Payment of the tax or the filing of a bond would, in
situated (Secs. 77,78 and 98, Tax Code.)
substance, be enough for the Commissioner to allow the
withdrawal.
----------------------------------------------------------
----------------------------------------------------------
119. 1) Are donations inter vivos and donations mortis C. Donors Tax
causa subject to estate taxes? (#2, 1994 Bar Exams)
121. A, an individual, sold to B, his brother in law, his lot
Suggested Answer:
with a market value of P1,000,000 for P600,000. As cost
in the lot is P100,000. B is financially capable of buying the
1) Donations inter vivos are subject to donors gift tax (Sec. 91
lot.
(a) Tax Code) while donations mortis causa are subject to estate
tax (Se. 77, Tax Code). However, donations inter vivos actually A also owns X Co., which has a fast growing business. A
constituting taxable lifetime like transfers in contemplation of sold some of his shares of stock in X Co. to his key
death or revocable transfers (sec. 78 (b) and (c), Tax Code) may executives in X Co. These executives are not related to A.
The selling price is P3,000,000, which is the book value of
TAX LAW REVIEWER
the shares sold but with a market value of P5,000,000. As

cost in the shares sold is P1,000,000. The purpose of A in
124. Your bachelor client, a Filipino residing in Quezon City,
selling the shares is to enable his key executives to acquire
wants to give his sister a gift of P 200,000. He seeks your
a propriety interest in the business and have a personal
advice, for purposes of reducing if not eliminating the
stake in its business. Explain if the above transactions are
donors tax on the gift, on whether it is better for him to give
subject to donors tax. (# 3, 1999 Bar Exams)
all of the P200,000 on Christmas 2001 or to give P 100,000
on Christmas 2001 and the other P 100,000 on January
2002. Please explain your advice. (#17, 2001 Bar
Suggested Answer:
Exams)
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 donors tax if the lot
Suggested Answer:
qualifies as a capital asset. The transfer for less than adequate
and full consideration, which gives rise to a deemed gift, does I would advise him to split the donation. Giving the
not apply to a sale of property subject to capital gains tax (Sec. P200,000 as a one time donation would mean that it would
100 NIRC). However, if the lot sold is an ordinary asset the be subject to a higher tax bracket under the graduated tax
excess of the fair market value over the consideration received structure thereby necessitating the payment of donors tax.
shall be considered as a gift subject to the donors tax. On the other hand, splitting the donation into two equal
The sale of shares of stock below the fair market amounts of P100,000 given on two different years will
value thereof is subject to the donors tax pursuant to the totally relieve the donor from the donors tax because the
provisions of Sec. 100 of the Tax Code. The excess of the fair first P1000,000 donation in the graduated brackets is
market value over the selling price is a deemed gift. exempt (Sec. 99 NIRC). While the donors tax is computed
---------------------------------------------------------- on the cumulative donations, the aggregation of all
donations made by a donor is allowed only over one
calendar year.
122. 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? (#12a, 2000 Bar
----------------------------------------------------------
Exams)
125. An insolvent company had an outstanding obligation

Suggested Answer: of P100,000.00 from a creditor. Since it could not pay the debt,
A stranger is a person who is not a : the creditor agreed to accept payment through dacion en pago a
a. brother, sister (whether by whole or by half- property which had a market value of P30,000. In the dacion en
blood), spouse, ancestor and lineal descendant; pago document, the balance of the debt was condoned.
or
b. Relative by consanguinity in the collateral line (a) What is the tax effect on the discharge of the
within the fourth degree of relationship (Sec. 98B unpaid balance of the obligation on the debtor corporation?
NIRC of 1997)
(b) Insofar as the creditor is concerned, how is he
---------------------------------------------------------- affected tax wise as a consequence of the transaction? (#11,
1997 Bar Exams)
Suggested Answer:
123. What conditions must occur in order that all grants,
donations and contributions to non-stock, non-profit private
(a) The condonation of the unpaid balance of the
educational institutions may be exempt from the donors
obligation has the effect of a donation made on the part of the
tax under Sec. 101(a) of the Tax Code? (#12b, 2000 Bar
creditor. It is obvious that the creditor merely desires to benefit
Exams)
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 latters gross
Suggested Answer: income (Sec. 50 RR No. 2);
The following are the conditions:
1. Not more than 30% of said gifts shall be used by such (b) For the difference of P70,000, the creditor shall
donee for administration purposes; be subject to donors tax at the applicable rates provided for
2. The educational institution is incorporated as a non-stock under the National Internal Revenue Code.
entity, paying no dividends, governed by trustees who
receive no compensation, and devoting all its income, Alternative Answer:
whether students fees or gifts, donations, subsidies or
other forms of philanthropy, to the accomplishment and (a) If the discharge was prompted by the insolvency
promotion of the purposes enumerated in its Articles of of the debtor company, then it is s clear case of a write off of a
Incorporation (Sec. 101 A3 NIRC of 1997) bad debts 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.
----------------------------------------------------------
TAX LAW REVIEWER
----------------------------------------------------------
----------------------------------------------------------
126. 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 127. Are contributions to a candidate in an election subject
land as a relocation site fro the less fortunate constituents of the to donors tax? On the part of the contributor, is it allowable as a
said municipality. In accordance therewith, the Municipal deduction from the gross income? (#14, 1998 Bar Exams)
Government of Pateros issued to the occupants/beneficiaries
Certificate of Award giving to them the respective areas where Suggested Answer:
their houses are erected. Through Ordinance No. 2, Series of
1998, the said municipal government ordained that the lots (a.) No, provided the recipient candidate had
awarded to the awardees/donees be finally transferred and compiled with requirement fro filing of returns of contributions
donated to them. Determine the tax consequence of the with the Commission of Elections as required under the
foregoing disposition with respect to Ace Tobacco Corporation, Omnibus Election Code.
the Municipal Government of Pateros, and the
occupants/beneficiaries. (#9, 1998 Bar Exams) (b.) The contributor is not allowed to deduct
the contributions because the said expenses is not directly
Suggested Answer: attributable to the development, management, operations and/or
conduct of a trade, business or profession (Sec. 34 (A)(1)(a),
The donation by the Ace Tobacco Corporation is NIRC). Furthermore, if the candidate is an incumbent
exempt from the donors tax because it qualifies as a gift to or government official or employee, it may even be considered as
for the use of any political subdivision of the National; a bribe or a kickback (Sec. 34 (A)(1)(c), NIRC).
Government (Section 102 (2), NIRC). The conveyance is
likewise exempt from documentary stamp because it is
transferred without consideration.
----------------------------------------------------------
Since the donation is to be used as a relocation site
for the les fortunate constituents of the municipality, it may be
128. Onyoc, an amateur boxer, won in a boxing competition
considered as an undertaking for human settlements, hence the
sponsored by the Golf Cup boxing Council, a sports association
value of the land maybe deductible in full from the gross income
duly accredited by the Philippine boxing Association. Onyoc
of the Ace Tobacco Corporation if in accordance to a National
received the amount of P500,000.00 as his prize which was
Priority Plan determine by the National Economic Development
donated by Ayala land Corporation. The BIR tried to collect
Authority (Section 34 [H](2)(a), NIRC). If the utilization is not in
income tax on the amount received by Onyoc and donors tax
accordance to a National Priority Plan determine by the NEDA ,
from Ayala Land Corporation, which taxes. Onyoc and Ayala
then Ace Tobacco corporation may deduct the value of eth land
Land Corporation refuse to pay. Decide. (#10, 1996 Bar
donated only to the extent of five (5%) percent of eth taxable
Exams)
income derived from the trade or business as computed without
the benefit of the donation. (Section 34 [H](2)(a), NIRC in
Suggested Answer:
relation to Sec. 34 [H](1), NIRC).
The prize will not constitute a taxable income to
Onyoc, hence the BIR is not correct in imposing the income tax.
The Municipality of Pateros is not is not subject to any
R.A. no. 7549 explicitly provides that All prizes and awards
donors tax on the value of the land it subsequently donated, it
granted to athletes in local and international sports tournaments
being exempt from taxes as a political subdivision of the
and competitions held in the Philippines or abroad and
National Government.
sanctioned by their respective national sports associations shall
The occupants/beneficiaries are subject to real
be exempt from income tax.
property taxes because they now own the land.
Neither is the BIR correct in collecting the donors tax
from Ayala Land Corporation. The law is clear when it
Alternative Answer on Taxability of Municipality and
categorically stated That the donors of said prizes and awards
Awardees:
shall be exempt from the payment of the donors tax.
The awarding by the Municipality Government of lots
----------------------------------------------------------
to specific awardees or donees is likewise exempt from the
donors tax because it is only an implementation of the purpose
for which the property was given by Ace Tobacco Corporation. 129. Kenneth Yusoph owns a commercial lot which he
The purpose of the first donation is to devote the land as a bought many years ago for P1 Million. It is now worth P20
relocation site fro the less fortunate constituents. If later on the Million although the zonal value is only P15 Million. He donates
Municipal Government gives out Certificate of Award over one-half pro-indiviso interest in the land to his son Dino on 31
specific lots occupied by the qualified occupants/beneficiaries, December 1994, and the other one-half pro-indiviso interest to
this is intended to perpetuate the purpose of the previous donor, the sme son on 2 January 1995.
the Municipality acting merely as conduit and not the true donor. 1.) How much is the value of the gifts in 1994 and 1995 for
This is simply a donation by the Municipality in form but not in purposes of computing the gift tax? Explain.
substance. 2.) The Revenue District Officer questions the splitting of the
donations into 1994 and 1995. he says that since there
The receipt by the occupant beneficiaries of their were only two (2) days separating the two donations they
respective lots through the Certificate of Award has no tax should be treated as one, having been made within one
implications. They are, however, liable for real property taxes. year. Is he correct? Explain.
TAX LAW REVIEWER
3.) Dino subsequently sold the land to a buyer for P20 1) Is the Christmas gift of P100,000.00 to Imeldas
Million. How much did Dino gain on the sale? Explain. parents subject to tax?
4.) Suppose, instead of receiving the lot by way of donation, 2) How about the donation to the parish church?
Dino received it by inheritance. What would be his gain 3) How about the donation to the PUP Alumni
on the sale of the lot for P20 Million? Explain. (#15, 1995 Association? (#8, 1994 Bar Exams)
Bar Exams)
Suggested Answer:
Suggested Answer:
1) The Christmas gift of P100,000.00 given by Imelda to
her parents is taxable up to P50,000.00 because under the law
1.) The value of the gifts for the purposes of (Sec. 92 (a) of the Tax Code), net gifts not exceeding
computing the gift tax shall be P7.5 million in 1994 and P7.5 P50,000.00 are exempt.
million in 1995. in valuing a real property for gift tax purposes
the property should be appraised at the higher of the two values 2) The donation of P80,000.00 to the parish church even
as of the time of donation which are (a) the fair market value as assuming that it is exclusively for religious purposes is not tax-
determined by the Commissioner (which is the zonal value fixed exempt because the exemption granted under Article VI, Sec.
pursuant to Section 16(e) of the Tax Code), or (b) the fair market 28(3) of the Constitution applies only to real estate taxes (Lladoc
value as shown in the schedule of values fixed by the Provincial v. Commissioner, 14 SCRA 292)
and City Assessors. The fact that the property is worth p20
million as of the time of donation is immaterial unless it can be 3) The donation to the PUP Alumni Association does not
shown that this value is one of the two values mentioned as also qualify for exemption both under Constitution and the afore
provided under section 81 of the Tax Code. ited law because it is not an educational or research
organization, corporation, institution, foundation or trust.
2.) The Revenue District Officer is not correct
because the computation of the gift tax is cumulative but only Alternative Answer:
insofar as gifts made within the same calendar year. Therefore,
there is no legal justification for treating two gifts effected in two Donations to the PUP Alumni Association is exempt
separate calendar years as one gift. from donors tax if it is proven that the association is a non-
stock, non-profit charitable association, paying no dividends,
3.) Dino gained an income of P19 million from the governed by trustees who receive no compensation, and
sale. Dino acquires a carry-over basis which is the basis of the devoting all its income to the accomplishment and promotion of
property in the hands of the donor or P1 million. The gain from the purposes enumerated in its articles of incorporation. Not
the sale or other disposition of property shall be the excess of more than 30% of the gift should be used for administration
the amount realized therefrom over the basis or adjusted basis purposes by the donee.
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,
131. Mr. Bill Morgan, a Canadian citizen and a resident of
the gain is computed by deducting the basis of P1 million from
Scarborough, Ontario, send a gift check of $20,000.00 to his
the amount realized which is P20 million.
future Filipino daughter in law who is to be married to his only
4.) If the commercial lot was received by inheritance
son in the Philippines.
the gain from the sale for p20 million is P5 million because the
basis id the fair market value as of the date of acquisition. The
1. Is the donation by Mr. Morgan subject to tax?
stepped-up basis of P15 million which is the value for estate tax
Explain. (#7, 1992 Bar Exams)
purposes is the basis for determining the gain (Sec. 34(b)(2),
NIRC).
Suggested Answer:
Alternative Answer:
Yes. While the gift has been made on account of
marriage, to qualify for exemption to the extent of the first
If Dino held on to the property as a capital asset in
P10,000.00 (now P50,000.00) of the value thereof, such gift
that it is neither for sale in the ordinary course of business nor
should have been given to a legitimate, recognized natural or
used in Dinos business, then upon sale thereof there is
adopted child of the donor.
presumed to be realized an income of P20 million which is the
gross selling price of the property. (Sec 21(e), NIRC). The same
Alternative Answer:
would be subject to the 5% capital gains tax.
It is not subject to tax because the gift was made
----------------------------------------------------------
outside the Philippines.
130. In 1991, Imelda gave her parents a Christmas gift of 2. What are the tax consequences if any, to the donee
P100,000.00 and a donation of P80,000.00 to her parish church. (Filipino daughter-in-law of Mr. Morgan)? (#7, 1992 Bar Exams)
She also donated a parcel of land for the construction of a
building to the PUP Alumni Association, a non-stock, non-profit Suggested Answer:
organization. Portions of the building shall be leased to generate
income for the association. The gift with respect to the donee, is excluded from
Gross income and is exempt from income taxation. There is no
donees gift tax.
TAX LAW REVIEWER
5. Fees for lodging paid by students to Bahay Bahayan

3. Can you name one kind of gift that is exempt from Dormitory, a private entity operating a student
donors tax which is extendible to both residents and non dormitory (monthly fee P1, 500). (1%) (#3, 1998 Bar
residents or non citizens of the Philippines? Include Exams)
qualifications, if any.
Suggested Answer:
Suggested Answer:
1. VAT exempt, sale of agricultural products, such
Gifts made to or for the use of the National as fresh vegetables, in their original state, of a kind generally
Government or any entity created by any of its agencies which used as, or producing foods for human consumption is exempt
is not conducted for profit or to any political subdivision of the from VAT. (Section 109(c), NIRC).
said Government are exempt from gift tax with respect to both
residents and non residents. 2. VAT at 0%. Since Jakes construction Company
has rendered services to the World Health Organization, which
ABC Computer Corp., purchased some years ago is an entity exempted from taxation under international to which
Membership Certificate No. 7 from the Calabar Golf Club, Inc. the Philippines is a signatory, the supply of services is subject to
for P300,000.00. In 4 September 1985, it transferred the same zero percent (0%) rate.
to Mr. John Johnson, its American computer consultant, to
enable him to avail of the facilities of the club during his stay 3. VAT at 10 %. Tractors and other agricultural
here. The consultancy agreement expired two (2) years later. In implements fall under the definition of goods which include all
the mean time, the value of the Club share appreciated and tangible objects which are capable of pecuniary estimation (Sec.
what was purchased by the corporation at P300,000.00, 106[A](1), NIRC), the sales of which are subject to VAT at 10 %
commanded a market value of P800,000.00 in 1987. Before he
returned home a few days after his tenure ended, Mr. Johnson 4. this is subject to VAT at 10 %. This transaction
transferred the subject share to Mr. Robert James, the new also falls under the definition of the goods which include all
consultant of the firm and the newly designated playing tangible objects which are capable of pecuniary estimation (Sec.
representative under a Deed of Declaration of Trust and 106[A](1), NIRC), the sales of which are subject to VAT at 10 %
Assignment of Shares wherein the former acknowledged the
absolute ownership of ABC Computer Corp. over the share, that 5. VAT Exempt. The monthly fee paid by each
the assignment was without any consideration, and that the student fall under the lease of residential units with a monthly
share was placed in his name because the Club required it to be rental per unit not exceeding P8, 000, which is exempt from VAT
done. regardless of the amount of aggregate rentals received by the
lessor during the year. (Sec. 109(x), NIRC). The term unit shall
Is the said assignment a gift and, therefore, subject to gift mean per person in the case of dormitories, boarding houses
tax? (#8, 1991 Bar Exams) and bed spaces (Sec. 4, 103 1, RR No. 7 95).
Suggested 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
133. Under the Value Added Tax (VAT), the tax is imposed
transfer of ownership or a quantifiable interest. More importantly,
on sales, barter, or exchanged of goods and services. The VAT
the transfer of the membership certificate was merely a
is also imposed on certain transactions deemed sales. What
designation of the consultant to be playing representative of
are these so called transactions deemed sales? (#14, 1997
ABC Computer Corporation in the Calabar Golf Club.
Bar Exams)
----------------------------------------------------------
Suggested Answer:
D. VAT
The following transaction shall be deemed sale:
132. State where the following transactions are a)
VAT Exempt, b) subject to VAT at 10%; or c) subject to VAT at (a) Transfer, use or consumption not in the course of business
0%: of goods originally intended fro sale or for use in the course
of business;
1. Sale of fresh vegetables by Aling Ining at the
Pamilihang Bayan of Trece Martirez; (1%) (b) Distribution or transfer to:
2. Services rendered by Jakes Construction Company, a 1. Shareholders or investors are

contractor to the World Health Organization in the share in the profits of VAT - registered persons; or
renovation of its offices in Manila. (1%)
2. Creditors in payment of debt
3. Sale of tractors and other agricultural implements by
Bungkal Incorporation to local farmers. (1%) (c) Consignment of goods if actual sale is not made within 60
days following the date such goods were consigned; and
4. Sale of RTW by Celys boutique, a Filipino dress
designer, in her dress shop and other outlets. (1%)
TAX LAW REVIEWER
Retirement from or cessation of business, with respect to

investors of taxable goods existing as of such retirement or
cessation. III.A. LOCAL TAXATION
---------------------------------------------------------- 135. Congress after much public hearing and consultation

with various sections of society, came to the conclusion that it
will be good for the country to have only one system of taxation
134. A) Newtex International (Phils.) Inc. is an American
by centralizing the imposition and collection of all taxes in the
firm duly authorized to engage in business in the Philippines as
national government. Accordingly, it is thinking of passing a law
a branch office. In its activity of acting as a buying agent for
that would abolish the taxing power of all local government
foreign buyers of shirts and dresses abroad and performing
units. In your opinion, would such law be valid under the
liason work between its home office and the Filipino garment
present Constitution? Explain your answer. (#19, 2001 Bar
manufacturers and exporters. Newtex does not generate any
Exams)
income. To finance its officer expenses here, its head office
abroad regularly remits to it the needed amount. To oversee its
Suggested Answer:
operations and manage its office here which had been in
operation for two (2) years, the head office assigned three (3) No. the law centralizing the imposition and collection
foreign personnel. of all taxes in the national government would contravene
the Constitution which mandates that :Every local
1)Is newtex International (Phils.) Inc. subject to VAT? government unit shall have the power to create their own
(#9, 1991 Bar Exams) sources of revenue and to levy taxes, fees, and charges
subject to such guidelines and limitations as the Congress
Suggested Answer: may provide consistent with the basic policy of local
autonomy. It is clear that Congress can only give the
Newtex International (Phil.) Inc. is not subject to VAT. guidelines and limitations on the exercise by the local
The VAT is imposed on sellers and not on buyers. The branch governments of the power to tax but what was granted by
office did not derive any income or compensation so as to the fundamental law cannot be withdrawn by Congress.
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 rate or exempt from VAT (Secs. 99-
100 NIRC).
B. Real Property Tax
2) Are the three foreign personnel subject to
Philippines income tax?
136. Give at least 2 fundamental principles governing real
property taxation, which are limitations on the taxing power
Suggested Answer:
of local governments insofar as the levying of the realty tax
is concerned. (#19a, 2000 Bar Exams)
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 Suggested Answer:
from sources within the country when it is earned for services Two fundamental principles governing real property
rendered in the Philippines (Sec. 22, in relation to Sec taxation are:
36,NIRC). 1. The appraisal must be at the current and fair market value;
and
B) Colawin Marketing Corp. (CMC) sells goods and 2. Classification for assessment must be on the basis of
renders services to Pinatubo Inc, a contractor for the U.S Base. actual use (Sec. 198, Local Government Code)
CMC applies for zero rate. Is it qualified for zero rating under the
pertinent Tax Code provisions on VAT? (#10, 1991 Bar Exams) Alternative Answer:
1. Assessment must be on the basis of uniform classification
Suggested Answer: 2. Appraisal, assessment, levy and collection shall not be let
to private persons; and
CMC is not qualified for zero rating. The goods and 3. Appraisal and assessment must be equitable. (Sec. 198,
service rendered to Pinatobo Inc, evidently a domestic Local Government Code)
corporation, cannot be considered as an export sale. Pinatobo
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 137. May the local governments impose an annual realty
special laws or by an International Agreement where the tax in addition to the basic real property tax on idle or
Philippines is a signatory effectively subject such sales to zero vacant lots located in residential subdivisions within their
rate (Sec. 100 NIRC). respective territorial jurisdictions? (#19b, 2000 Bar
Exams)
----------------------------------------------------------
Suggested Answer:
TAX LAW REVIEWER
Not all local government units may do so. Only On March 15, 1979, Edna filed a complaint to annul
provinces, cities and municipalities within the Metro Manila Area the auction sale which was denied by the CFI Judge of Naga
(Sec. 232, LGC) may impose an ad valorem tax not exceeding City. In fact the CFI Judge ordered the TCT # 4739 of Edna be
five percent of the assessed value (Sec. 236 LGC) of idle or cancelled and that a new title be issued to Angel Chua.
vacant residential lots in a subdivision, duly approved by proper
authorities regardless of area. (Sec. 237 LGC) On appeal, the Court of Appeal affirmed the CFI
decision in toto.
----------------------------------------------------------
Edna then elevated the case to the Supreme Court
citing several grave errors of law among which are:
138. Under Article 415 of the Civil Code, in order for 1. That her tax delinquencies (involving P5,800) for
machinery and equipment to be considered real property, non payment of real estate taxes were offset by the sum of
they must be placed by the owner of the land and, in P6,700.00 which the government of the Philippines owed her.
addition, must tend to directly meet the needs of the She claims that her tax delinquencies have been extinguished
industry or works carried on by the owner. Oil companies, by legal compensation:
such as Caltex and Shell install underground tanks in the
gasoline stations located on land leased by the oil 2. That the price of P5,800.00 paid by Angel Chua
companies from others. Are those underground tanks was grossly inadequate and that because of its inadequacy, the
which were not placed there by the owner of the land but same is tantamount to deprivation of property without due
which were instead placed there by the lessee of the land, process of law:
considered real property for purposes of real property
taxation under the Local Government Code? Explain your 3. That the public auction made on her property is
answer. (#20, 2001 Bar Exams) void.
Suggested Answer: Discuss the merits of the appeal. (#9, 1992 Bar
Exams)
Yes. The underground tanks although installed by the
lessee are considered as real property for purposes of the Suggested Answer:
imposition of real property taxes. It is only for purposes of
executing a final adjustment that these machinery and 1. The decision of the Court of Appeals affirming the
equipment, installed by the lessee on the leased land, CFI decision must be affirmed.
would not be considered as real property. But in the
imposition of the real property tax, the underground tanks On the procedural aspect, it has not been shown, as
are taxable as necessary fixtures of the gasoline station required under the Real Property Tax Code that plaintiff has paid
without which the gasoline station would not be the amount for which the real property has been sold plus
operational. (Caltex Phils. Inc. v CBAA 114 SCRA 296) interest.
---------------------------------------------------------- On the claim of extinction of tax inability 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
139. Mrs. Edna Dinoso is the registered owner of a the government does not owe the plaintiff any amount.
residential lot with two storey house situated in Naga City. The
lot with an area of 328 sq. meters is described and covered by 2. On the claim that the price for the property was
TCT No. 4739 of the Registry of Deeds of Naga City. grossly inadequate, the Real Property Tax Code specifically
mentions that the sale of real property at public auction is to
On September 12, 1977, a 115 sq. meter portion of satisfy all the taxes and penalties due and cost of sale (sec.
Ednas property was expropriated by the Republic of the 73). Thus, the selling price is based not on the fair market value
Philippines fro the sum of P6,700.00 representing the assessed of the property sold at public auction but the amount of real
value of the aforesaid portion. This amount was deposited by property taxes due thereon. In any case, the delinquent
the Government in Ednas Account. taxpayer is given one year from the date of registration of the
sale within which to redeem the property by paying the taxes
For almost ten years, Edna failed to pay her real due plus costs and interest.
estate taxes on the same property. Thus, on November 5, 1977, 3. On the claim that the public auction made on the
her property was sold at public auction by the City Treasurer of property is void, the Real Property Tax code provides (sec. 83,
Naga City to satisfy her real estate tax delinquencies amounting 2nd par.) that a court shall not declare a sale invalid due to
to P5,800.00. The highest bidder for the property was Angel irregularities in the proceedings unless such irregularities have
Chua. impaired the substantial rights of the taxpayer. In the case at
bar, the plaintiff received a notice of hearing for the petition for
Edna was not present at the public auction although entry of a new certificate of title during which she could have
she later admitted having received the notice of hearing for the questioned any irregularity in the conduct of the sale.
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.)
TAX LAW REVIEWER
140. A) The Municipality of Malolos passed an ordinance 2) Is the Municipality correct in insisting collecting the
imposing a tax on any sale or transfer of real property located tax? (#16, 1991 Bar Exams)
within the municipality at a rate of one-fourth (1/4) of one
percentum (1%) of the total consideration of such transactions. Suggested Answer:
X sold a parcel of land in Malolos which he inherited from his
deceased parents and refused to pay the aforesaid tax. He No, the Municipality was incorrect in insisting on the
instead filed appropriate case asking that the ordinance be collection of the tax. Once the tax on occupation is paid as
declared null and void since such a tax can be collected by the stated in paragraph (a), above, the lawyer is entitled to practice
national government, as in fact he has paid BIR the required his profession or calling in all parts of the Philippines without
capital gains tax. The municipality counted that under the being subject to any other national or local tax, license or fee for
Constitution, each local government is vested with the power to the practice of such profession or calling.
create its own source of revenue and to levy taxes, and it
imposed the subject tax in this exercise of said constitutional 3) Will the inaction of the Secretary of Finance bar the
authority. professional in the Municipality from questioning the legality of
that ordinance?
Resolve the controversy. (#15, 1991 Bar Exams)
Suggested Answer:
Suggested Answer:
The inaction of the Secretary of Finance does not bar
The ordinance passed by the Municipality of Malolos the professional in the Municipality from questioning the legality
imposing a tax on the sale or transfer of real property is void. of the ordinance. While it is true that Secretary of Finance may
The Local Tax Code only allows provinces and cities to impose himself suspend the tax ordinance within the 120 day period
a tax on the transfer of ownership of real property (Sec. 7 and from receipt thereof, his failure to do so, adversely affected by
Sec. 23, Local Tax Code). Municipalities are prohibited from the ordinance.
imposing said tax that provinces are specifically authorized to
levy. (Sec. 22, Local Tax Code). 4) What remedies are available to the taxpayer to enable
him to question the legality of the ordinance?
While it is true that the Constitution has given broad
powers of taxation to local government units, this delegation, Suggested Answer:
however, is subject to such limitations as may be provided by
law (Sec. 5, Art. X, 1987 Constitution). The taxpayer may pursue his remedies either
administratively or judicially. He may, as the case warrants, file a
B) The Municipality of Argao, Province of Cebu formal protest with the Secretary of Finance query with the
passed a tax ordinance requiring all professionals practicing in Provincial Fiscal whose opinion is appealable to the Secretary of
the municipality to pay tax equivalent to two (2%) percent of Justice whose decision may be contested in the proper court.
their gross income. A certified true copy of the ordinance was The other remedy would be to file special civil action for
sent to Secretary of Finance for review on 1 March 1989 and declaratory relief (if circumstances still warrant) or to pay the tax
was received by him on the same day. On 15 August 1989, even and thereafter to file an action for refund within six (6) years
as the tax ordinance remain unacted upon by the Secretary of after such payment.
Finance, the municipality started collecting the tax in question.
The members of the Philippine Bar in the municipality Alternative Answer:
questioned the legality of the ordinance and sought the
suspension of the collection of the tax, but the municipality On the basis of the facts of the problem, it would
argued that since the Secretary has not taken any action of the appear that the administrative remedy is no longer available
ordinance for more than one hundred twenty days after his since there is already an attempt to enforce collection. The only
receipt thereof, the legality of the ordinance can no longer be remedy of the taxpayer is to pay the tax and sue for its recovery
questioned and insisted on the collection of tax. in the ordinary court.
1) Is the tax ordinance in question legal? (#16, 1991 Bar

----------------------------------------------------------
Exams)
Suggested Answer:
141. In view of the street widening and cementing of roads
No, the tax ordinance is not legal as the Local Tax and the improvement of drainage and sewers in the district of
Code allows provinces and cities, to the exclusion of Ermita, the City Council of the City of Manila passed an
municipalities, to impose an annual occupation tax on all ordinance imposing and collecting special levy on lands in the
persons engaged in the exercise or practiced of their profession district, Jose Reyes, a land owner and resident of Ermita,
or calling in specified amounts which in the case of lawyers is submitted a protest against the special levy fifteen (15) days
P75 per annum (Secs. 11 and 12 in relation to Sec. 23, Local after the last publication of the ordinance alleging that the
Tax Code). A person authorized to practice his profession or special levy was exorbitant since the rate thereof was more than
calling shall pay the tax to province where he practices his the maximum rate of two (2%) percent of the assessed value of
profession or calling or maintains his office. the real properties allowed by Section 39 of P.D. 464, as
amended.
No local government unit can impose a tax on income
(Sec. 5, Local Tax Code).
TAX LAW REVIEWER
Assuming that Jose Reyes is able to prove that the (b) Countervailing Duty This is a study equal to the
rate of the special levy is more than the aforesaid percentage ascertained or estimated amount of the subsidy or bounty
limitation of 2%, will his protest prosper? (#17, 1991 Bar Exams) or subvention granted by the foreign country on the
production, manufacture, or exportation into the Philippines
Suggested Answer: of any article likely to injure an industry in the Philippines or
retard or considerable retard the establishment of such
The special levy under the Real Property Tax Code on industry;
lands, specially benefited by the proposed infrastructure, may
not exceed sixty percent (60%) of the cost of said improvement. (c) Marking Duty This is a duty on an ad valorem basis
All lands comprised within the district benefited are subject to imposed for improperly marked articles. The law requires
the special levy except lands exempt from the real property tax that foreign importation must be marked in any official
(Sec. 47, RPT). The protest shall be filed not later than thirty language of the Philippines the name of the country of
days after the publication of ordinance and may be submitted to origin of the article;
the City Sanggunian signed by a majority of the land owners
affected by the proposed work. If such no protest is filed in the (d) Discriminatory or Retaliatory Duty This is a duty imposed
manner above specified, the city ordinance shall become final on imported goods whenever it is found as a fact that the
an effective. The levy imposed under the ordinance should be country of origin discriminates against the commerce of the
within the limit of sixty percent (60%) of the total cost of the Philippines in such a manner as to place the commerce the
proposed improvement. The rate of two percent (2%) of the Philippines at a disadvantage compared with the
assessed value under Section 39 of P.D. 464 refers to the real commerce of any foreign country.
property tax and not to specials levies.
---------------------------------------------------------- ----------------------------------------------------------
144. The Tariff and Customs code allows the Bureau of

IV. TARIFF AND CUSTOMS CODE Customs to resort to the administrative remedy of seizure, such
as by enforcing the tax lien on the imported article, and to the
142. On the basis of a warrant of seizure and detention judicial remedy of filling of action in court. When does the
issued by the Collector of Customs for the purpose of Bureau of Customs normally avail of itself ---
enforcing the Tariff and Customs Laws, assorted brands of
cigarettes said to have been illegally imported into the (a) of the administrative, instead of the judicial
Philippines were seized from a store where they were remedy, or
openly offered for sale. Dissatisfied with the decision
rendered after hearing by the Collector of Customs on the (b) of the latter, instead of the former, remedy?
confiscation of the articles, the importer filed a petition for (#18, 1997 Bar Exams)
review with the Court of Tax Appeals. The Collector moved
to dismiss the petition for lack of jurisdiction. Rule on the Suggested Answer:
motion. (#20a, 2000 Bar Exams)
(a) The Bureau of customs normally avails itself of

Suggested Answer: the administrative remedy of seizure, such as by enforcing the
tax lien on the imported articles. Instead of the judicial remedy
Motion granted. The CTA has jurisdiction only over when the goods to which the tax lien attaches, regardless of
decisions of the Commissioner of Customs in cases ownership, is still in the custody or control of the Government. In
involving seizures, detention or release of property the case, however, of importations which are prohibited or
affected. (Sec. 7, RA No. 1125). There is no decision yet of undeclared, the remedy of seizure and forfeiture may still be
the Commissioner which is subject to review by the CTA. 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 of tax lien , the government
can seek payment of the tax liability through judicial
143. Explain briefly each of the special customs duties
authorized under the Tariffs and Customs Code. (#17, 1997 Bar
Exams)
Answer: ----------------------------------------------------------
The following are the special duties imposed under

the Tariff and Customs Code: 145. Under the same facts, could the importer file an action
in the RTC for replevin on the ground that the articles are
(a) Dumping Duty This is a duty levied on imported goods being wrongfully detained by the Collector of Customs
where it appears that a specific kind or class of foreign since the importation was not illegal and therefore exempt
article is being imported into or sold or is likely to be sold in from seizure? Explain. (#20b, 2000 Bar Exams)
the Philippines at a price less than its fair value;
Suggested Answer:
TAX LAW REVIEWER
No. The legislators intended to divest the RTC of the Yes. During the pendency of the appeal, the taxpayer
jurisdiction to replevin a property which is a subject of may still enter into a compromise settlement of his tax liability for
seizure and forfeiture proceedings for violation of the Tariff as long as any of the grounds for a compromise, i.e. doubtful
and Customs Code otherwise, actions for forfeiture of validity of assessment and financial incapacity of taxpayer, is
property for violation of the Customs laws could easily be present. A compromise of a tax liability is possible at any stage
undermined by the simple device of replevin. ( Dela Fuente of litigation, even during appeal, although legal propriety
v Dela Fuente, et al, 120 SCRA 455) demands that prior leave of court should be obtained (Pasudeco
vs. cir l-39387, June 29, 1982).
There should be no unnecessary hindrance on the
governments drive to prevent smuggling and other frauds
----------------------------------------------------------
upon the Customs. Furthermore, the RTC 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 148. On January 1, 1996, armed with warrants of seizure
been instituted to perform. (Jao et al, v. CA, et al and and detention issued by the Bureau of Custom, members of the
companion case, 249 SCRA 35, 43) 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 the custom 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.
146. What do you understand by the term flexible tariff
clause as used in the Tariff and Customs Code? (#18, On January 15, 1996, the customs personnel started
2001 Bar Exams) hauling the articles pursuant to the amended warrant. This
prompted Mr. Ho to file a case for injunction and damages with a
Suggested Answer: prayer for a restraining order before the Regional Trial Court of
Quezon City against the Bureau of Customs on January 27,
The said term refers to the authority given to the 1996. on the same date, the trial court issued a temporary
President to adjust tariff rates under Section 401 of the restraining order.
Tariff and Customs Code, which is the enabling law that
made effective the delegation of the taxing power to the 3.) A motion to dismiss was filed by the Bureau of
President under the Constitution. Customs on the ground that the Regional Trial Court has no
jurisdiction over the subject matter of the compliant claiming that
it was the Bureau of Customs that has exclusive jurisdiction over
it. Decide. (#13, 1996 Bar Exams)
----------------------------------------------------------
147.
1.) May the Court of Tax Appeals issue an injunction to Suggested Answer:
enjoin the collection of taxes by the Bureau of Internal revenue?
Explain. The motion to dismiss should be granted. Seizure and
forfeiture proceedings are within the exclusive jurisdiction of the
Suggested Answer: Collector of Customs to the exclusion of regular Courts.
Regional Trial Courts are devoid of competence to pass upon
Yes. When a decision of the Commissioner on a tax the validity or regularity of seizure and forfeiture proceedings
protest is appealed to the CTA pursuant to Sec. 11 of R.A. No. conducted by the Bureau of Customs and to enjoin or otherwise
1125 (law creating the CTA) in relation to Sec. 229 of the NIRC, interfere with these proceedings (Republic vs. CFT of Manila
such appeal does not suspend the payment, levy, distraint and/ [Branch XXII], G.R. No. 43747, September 2, 1992: Jao vs. CA.
or sale of any of the taxpayers property for the satisfaction of G.R. No. 104604; October 6, 1995).
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 collection of the tax ----------------------------------------------------------
and require the taxpayer either to deposit the amount claimed or 149.
to file a surety bond for not more than double the amount with 1.) When does importation begin and when does it
the Court. end?
2.) Under the Tariff and Customs code, what are
2.) May the tax liability of a taxpayer be compromised a.) dumping duties
during the pendency of an appeal? Explain. (#12, 1996 Bar b.) countervailing duties
Exams) c.) marking duties
d.) discriminatory duties (#16, 1995 Bar Exams)
Suggested Answer: Suggested Answer:
TAX LAW REVIEWER
1.) Importation begins from the time the carrying vessel or prima facie presumption or knowledge or participation if the
aircraft enters Philippine territorial jurisdiction with the intention owner is not in the business for which the conveyance is
to unload therein and ends at the time the goods are released or generally used. Thus, not having a certificate of public
withdrawn from the customhouse upon payment of the customs convenience to operate a trucking business, he is legally
duties or with legal permit to withdraw (Viduya vs. Berdiago, 73 deemed not to have been engaged in the trucking business.
SCRA 553). (Sec. 2531, Tariff and Customs Code).
2.) a.) Dumping duties are special duties imposed ----------------------------------------------------------

by the Secretary of Finance upon recommendation of the Tariff
Commission when ot is found that the price of the imported
articles is deliberately or continually fixed at less than the fair
151. Sometime in 15 September 1990, a shipment of 150
market value or cost of production, and the importation would
packages of imported goods and personal effects arrived and
cause or likely cause an injury to local industries engaged in the
was unloaded at the Port of Manila. After the amount of
manufacture or production of the same or similar articles or
P15,887.00 was paid by the consignee as customs duties,
prevent their establishment.
internal revenue taxes, fees and other charges, the packages
b.) Countervailing duties are special duties
were released from the Customs house. As the packages were
imposed by the Secretary of Finance upon prior investigation
being transported from the Customs area to their destination,
and report of the Tariff Commission to offset an excise or inland
the truck carrying them was intercepted at T.M. Kalaw St.,
revenue tax upon articles of the same class manufactured at
Ermita, Manila by agents of the Economic Intelligence and
home or subsidies to foreign producers or manufacturers by
Investigation Bureau (EIIB). In a formal communication, EIIB
their respective governments.
informed the Collector of Customs that the packages were
c.) Marking duties are special duties equivalent
released from the customs zone without proper appraisal to the
to 5% ad valorem imposed on articles not properly marked.
damage of the Government and requested for the issuance of
These are collected by the Commissioner of Customs except
the necessary warrant of the seizure. Seizure proceedings (S.I.
when the improperly marked articles are exported or destroyed
No. 796) was then instituted and the Collector of Customs
under customs supervision and prior to final liquidation of the
issued a warrant of seizure and detention.
corresponding entry. These duties are designed to prevent
possible deception of the customers.
During the progress of the search and seizure, and
d.) Discriminatory duties are special duties
while the goods were being removed by the Customs agents
collected in an amount not exceeding 100% ad valorem,
from the bodegas where they were stored, the consignee filed a
imposed by the President of the Philippines against goods of a
Petition (Civil Case No. 234) with the Regional Trial Court of
foreign country which discriminates against Philippine
Manila asking that the Collector of Customs and all his agents
commerce or against goods coming from the Philippines and
be restrained from the further enforcing the aforesaid warrant
shipped to a foreign country.
and from proceeding with the trial of S.I. 796, and that said
warrant be declared null and void since the Collector no longer
Action since the tax liability of the importer constitutes
had jurisdiction to issue the same considering that the customs
a personal debt to the government, therefore, enforceable by
duties and taxes had already been paid and the goods had left
action. In this case judicial remedy is normally avail of instead
the control and jurisdiction of the Bureau of Customs.
of the administrative remedy.
1) Did the Collector of Customs have jurisdiction to
----------------------------------------------------------
issue the warrant of seizure and detention? (#13, 1991 Bar
Exams)
150. In smuggling a shipment of garlic, the smugglers used Suggested Answer:

an eight-wheeler tuck which they hired for the purpose of taking
out the shipment from the customs zone. Danny, the truck On the assumption that the goods were released from
owner, did not have a certificate of public convenience to Customs custody without proper appraisal as contended by
operate his trucking business. Danny did not know that the EIIB, the Collector of Customs had jurisdiction to issue the
shipment of garlic was illegally imported. warrant of seizure and detention. This remedy is generally
Can the Collector of Customs o the port seize and available in importations tainted with irregularity (Sec. 2531,
forfeit the truck as an instrument in the smuggling? (#5, 1994 TCC; Viduya vs. Berdiago, 73 SCRA 553).
Bar Exams)
2) Did the payment of the customs duties, taxes, etc.
Suggested Answer: render illegal and improper the issuance of the said warrant?
Yes, the Collector of Customs of the port seize and Suggested Answer:
forfeit the truck as an instrument in the smuggling activity since
the same was used unlawfully in the importation of smuggling In seizure and forfeiture, the payment of customs
articles. The mere carrying of such articles on board the truck (in duties, taxes, etc., does not necessary render s irregular and
commercial quantities) shall subject the truck to forfeiture, since improper the issuance of a warrant of seizure and detention.
it was not being used as a duly authorized common carrier, What is consequential is whether there was, in fact, an
which was chartered or leased as such. (Sec. 2530 [a] TCC). irregularity committed in the importation of the articles and their
release from customs.
Moreover, although forfeiture of the vehicle will not be
effected if it is established that the owner thereof had no 3) Has the Regional Trial Court jurisdiction to hear and
knowledge of or participation in the unlawful act, these arises a decide Civil Case No. 234?
TAX LAW REVIEWER
Suggested Answer: 153. M/V Floria, a vessel of Philippine registry, was hired to
transport beans from Singapore to India. The vessel was
No. the RTC has no jurisdiction. In the case of allegedly hijacked at the sea and found its way to Bataan. It is
seizures and forfeitures, an ordinary court may not take also alleged that said beans are now with the ListCo, and fake
cognizance of the case and, therefore, said courts would be documents were used to show that the beans were imported
bereft of jurisdiction to hear and decide the same. The from Japan. The Collector of Customs seized t he M/V Floria
jurisdiction of the Collector of Customs in seizure and forfeiture and its cargo. The owner of M/V Floria filed a complaint in the
proceedings is exclusive of all other courts. The proper remedy Regional Trial Court to obtain possession of the vessel and
would be to go through with the hearing of the case with the beans, Does the RTC have jurisdiction over the case? (#9, 1993
Collector of Customs from whose decision an appeal may be Bar Exams)
made to the Commissioner of Customs and, thereafter, I the
taxpayer still feels aggrieved to the Court of Tax Appeals. Suggested 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
152. The Collector of Customs instituted seizure
jurisdiction to pass upon the validity or regularity of the seizure
proceedings against a shipment of motor vehicles. State the
and forfeiture proceedings conducted by the Bureau of
procedure for the review of the decision up to the Supreme
Customs. ( Commissioner of Customs vs. Makasiar, 177 SCRA
Court of the Collector of Customs adverse to the importer. (#14,
27, 33-34 (1989) citing Pacts vs, Averia, 18 SCRA 907(1966))
1994 Bar Exams)
Neither has RTC review powers over actions
Suggested Answer:
concerning seizure and forfeiture proceedings conducted by the
Collector of Customs which is reviewable by the Commissioner
The procedure in seizure cases may be summarized
of Customs whose decision, in return, is reviewable by the Court
as follows:
of Tax Appeals. (Ibid)
- The collector gives the importer issues a
warrant for the detention or forfeiture of the
imported articles; (Sec. 2301, Tariff and Customs
Code).
a) No. The owner must have first appealed the
decision of the Collector of Customs, and if the decision was
- The Collector gives the importer a written
adverse, then the Court of Tax Appeals, consistent with the
notice of the seizure and fixes a hearing date to
principle of exhaustion of administrative remedies.
give the importer an opportunity to be heard; (Sec.
2303, TCC).
b) No. The question of seizure and forfeiture is for the
Collector of Customs to determine in the first instance and then
- A formal hearing is conducted; (Sec. 2312,
the Commissioner of Customs. This is a field where the doctrine
TCC).
of the primary jurisdiction controls. The Collector of Customs
when sitting in forfeiture proceedings, constitutes a tribunal upon
- The collector renders a declaration of
which the law confers jurisdiction to hear and determine all
forfeiture; (Sec. 2312, TCC).
questions touching the forfeiture and further disposition of the
subject matter. The exclusive jurisdiction in seizure and
- The importer aggrieved by the action of the
forfeiture cases vested in the Collector of Customs precludes
Collector in any case of seizure may appeal to the
the RTC from assuming cognizance over the matter. The RTC is
Commissioner for his review within fifteen (15) days
thus devoid of competence to act on the matter. (Republic v. CFI
from written notice of the Collectors decision;(Sec.
of Manila, 213 SCRA 222)
2313, TCC)
----------------------------------------------------------
- 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) 154. A disgruntled employee of Apache Corporation
reported to the Commissioner of Custom that the company is
- The importer adversely affected by the illegally importing electronic equipment by way of unlawful
decision of the Court of Tax Appeals may appeal to shipside activities thereby evading payment of custom duties
the Court of Appeals within fifteen (15) days which and taxes on goods.
may be extended for another fifteen (15) days of
such period as the Court of Tax Appeals may Accordingly, the Commissioner of Customs, upon the
decide. request of the Economic intelligence and Investigation Bureau
(EIIB), issued warrants of seizure and detention and directed
EIIB to seize 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,
TAX LAW REVIEWER
prohibition and mandamus to enjoin the Commissioner of No, the objections are not tenable as the Executive
Customs and his agents from continuing further with the Order cannot take effect immediately. Being an external law
forfeiture proceedings and praying that the Commissioner return and having the effect of law, the Executive Order cannot
the confiscated articles on the ground that the warrants were in become effective without publication, a requirement of due
violation of the Rules of the Court and the Bill of Rights. process (Tanada vs. Tuvera, 136 SCRA 27: Executive Order No.
202).
If you are a newly appointed Solicitor of the office of
the Solicitor General representing the commissioner of Alternative Answer:
Customs, how would you defend the latter? Give the specific
defenses. (# 8, 1992 Bar Exams) Under the Flexible Tariff Clause (Sec. 401, Tariff and
Customs Code), any order issued by the President thereunder
Suggested Answer: 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.
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.
156. Dagat-dagatan Shipping Corp. (DSC) brought to the
This is historically considered an exemption from the
country two (2) non-propelled foreign barges which DSC
constitutional guarantee against unreasonable searches and
chartered for use in the Philippines coastwise trade under a
seizures.
Temporary Certificate of Philippine Registration, to be returned
to the foreign owner upon termination of the charter period but
2. Assuming that the enforcement of the warrant had
not beyond 1999, pursuant to P.D. 760, as amended. Upon their
been extended to the residence of the President of Apache
arrival, the barges were subjected to the duty by the Bureau of
Corporation, is such enforcement valid? Explain. (Question No.
Customs. DSC, refused to pay any customs duty contending
8, 1992 Bar Exams)
that the carter or lease of the barges, which will be returned to
the foreign owner when the charter expires, is not an importation
Suggested Answer:
and, therefore cannot be subjected to any customs duty.
No. The Tariff and Customs Code authorizes custom
1) Is DSCs refusal with or without legal basis? (#18,
officials and agents to search any building, except dwelling
1991 Bar Exams)
houses.
Suggested Answer:
3. Do you think the petition for certiorari, prohibition
and mandamus filed by Apache Corporation will prosper in the
DSCs is without legal basis. The term imposition
Supreme Court? Discuss.
includes the entry into the country of any article from a foreign
country. The fact that imported goods are to be re-exported
Suggested Answer:
does not mean that the customs duties may not be imposed,
although, in certain cases and subject to limitations prescribed
No. The choice of remedy assumes want of authority
by the Tariff and Customs Code a drawback may be available to
and jurisdiction. Warrant less searches and seizures are,
the taxpayer so as to be able to obtain the refund. An example
however, authorized under TCC. Such searches and seizures
of which are articles which are used in the manufacture of
are not considered unreasonable within the meaning of the
products for export within three (3) years after the importation.
constitutional guarantee.
2) On what is the dutiable value of any imported article
----------------------------------------------------------
based? (#18, 1991 Bar Exams)
155. In view of the unfavorable balance of payment Suggested Answer:

condition and the interesting budget deficit, the President of the
Philippines, upon the recommendation of National Economic The dutiable value of imported articles is the home
and Development Authority, issues during a recess of Congress consumption cost value, i.e., the cost fair market value or price
an Executive Order imposing an additional duty on all imports at of the imported articles in wholesale quantities in the principal
the rate of ten (10%) percent ad valorem. The Executive Order market of the exporting country or country of origin, including
also provides that the small shall take effect immediately. expenses collected from importation such as insurance, freight,
Ricardo San Miguel, an importer, questions the legality of the packaging, loading and unloading charges but including internal
Executive Order on the grounds that only Congress has the excise taxes in case such value is unascertainable, the
authority to fix the rate of import duties and, in any event, such Commissioner may also determined the home consumption
an Executive Order can take effect only thirty (30) days after value from any reliable and available data (Sec. 201, TCC, as
promulgation and the President has no authority to shorten the amended: Commissioner vs. Court of Tax Appeals, G.R. No.
said period. 72069, 21 May 1988).
Are the objections of Mr. San Miguel tenable? (#14, ----------------------------------------------------------

1991 Bar Exams)
V. REMEDIES
Suggested Answer:
TAX LAW REVIEWER
157. A Co, a Philippine Corporation filed its 1995 income 2. Has the RTC jurisdiction over the collection case filed
Tax Return on April 15, 1996 showing a net loss. On by the BIR? Explain. (#4b, 1999 Bar Exams)
November 10, 1996, it amended its 1995 ITR to show more
losses. After a tax investigation, the BIR disallowed certain
Suggested Answer:
deductions claimed by A Co., putting A Co. in a net income
1. Yes, the CTA has jurisdiction over the case because this
position. As a result, on August 5, 1999, the BIR issued a
qualifies as an appeal from the Commissioners decision on
deficiency income assessment against A Co. A Co.
disputed assessment. When the Commissioner decided to
protested the assessment on the ground that it has
collect the tax assessed without first deciding on the taxpayers
prescribed. Decide. (#1, 1999 Bar Exams)
protest, the effect of the Commissioners 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.
Suggested Answer:
(Republic v. Lim Tian Teng & Sons, Inc. 16 SCRA 584; Dayrit v.
The right of the BIR to assess the tax has not
Cruz September 26, 1988)
prescribed. The rule is that internal revenue taxes shall be
2. The RTC has no jurisdiction over the collection case filed
assessed within 3 years after the last day prescribed by law for
by the BIR. The filing of an appeal with the CTA has the effect
the filing of the return (Sec. 203, NIRC). However, if the return
of divesting the RTC of jurisdiction over the collection case. At
originally filed is amended substantially, the counting of the
the moment the taxpayer appeals the case to the CTA in view of
three-year period starts from the date the amended return was
the Commissioners filing of the collection case with the RTC
filed. (CIR v. Phoenix Assurance Co., Ltd., 14 SCRA 52). There
which was considered as a decision of denial, it gives a
is a substantial amendment in this case because a new return
justifiable basis for the taxpayer to move for dismissal in the
was filed declaring more losses, which can only be done either
RTC of the Governments action to collect the tax liability under
(1) in reducing gross income or (2) in increasing the items of
dispute. (Yabes v. Flojo, 15 SCRA 278; San Juan v. Vasquez 3
deductions, claimed.
SCRA 92). There is no final, executory and demandable
assessment which can be enforced by the BIR once a timely
---------------------------------------------------------- appeal is filed.
----------------------------------------------------------
158. 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
160. A Co., a Philippine corporation, received an income
properties as real properties subject to the real property
tax deficiency assessment from the BIR on November 25,
tax. A Co. appealed the matter to the Muntinlupa Board of
1996. On December 10, 1997, A Co. filed its protest with
Assessment Appeals. The Board ruled in favor of the City.
the BIR. On May 20, 1997, the BIR issued a warrant of
In accordance with RA 1125, A Co., brought a petition for
distraint to enforce the assessment. This warrant was
review before the CTA to appeal the decision of the City
served on A Co. on May 25, 1997. In a letter dated June 4,
Board of Assessment Appeals. Is the Petition for Review
1997 and received by A Co. 5 days later, the CIR formally
proper? Explain. (#2, 1999 Bar Exams)
denied A Co.s protest stating that it constitutes his final
decision on the matter. On July 6, 1997, A Co. filed a
Petition for Review with the CTA. The BIR moved to
Suggested Answer: dismiss the Petition on the ground that the CTA has no
No. The CTA is devoid of jurisdiction to entertain jurisdiction over the case. Decide. (#5, 1999 Bar Exams)
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
Suggested Answer:
Government Code, has appellate jurisdiction over decisions of
The CTA has jurisdiction over the case. The
the Local Board of Assessment Appeals. (Caltex Phils. Inc. v.
appealable decision is the one which categorically stated that
Central Board of Assessment Appeals, May 31, 1982).
the Commissioners 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 musts categorically state that his action on a disputed
159. A Co., a Philippine corporation, received an income assessment is final; otherwise, the period to appeal will not
tax deficiency assessment from the BIR on May 5, 1995. commence to run. That final action can not be implied from the
On May 31, 1995, A Co filed its protest with the BIR. On mere issuance of a warrant of distraint and levy. (CIR v. Union
July 30, 1995, A Co. submitted to the BIR all relevant Shipping Corporation, 185 SCRA 547).
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 RTC. On February 161. Describe separately the procedures on the
20, 1996, A Co. brought a Petition for Review before the legal remedies under the Tax Code available to an aggrieved
CTA. The BIR contended that the Petition is premature taxpayer both at the administrative and judicial levels (5%) (#18,
since there was no formal denial of the protest of A Co., 2000 Bar Exams)
and should therefore be dismissed.
1. Has the CTA jurisdiction over the case? Suggested Answer:
TAX LAW REVIEWER
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
161. Mr. Reyes, a Filipino citizen engaged in the
refund.
real estate business, filed his 1994 income tax return on March
The procedures for the administrative remedies for 20, 1995. On December 15, 1995, he left the Philippines as an
assessment are as follows: immigrant to join his family in Canada. After the investigation of
said return, the BIR issued a notice of deficiency income tax
a. After receipt of the Pre-Assessment Notice, he must within
assessment on April 15, 1998. Mr. Reyes returned to the
15 days from receipt explain why no additional taxes
Philippines as a balikbayan on December 8, 1998. Finding his
should be assessed against him.
name to be in the list of delinquent taxpayers, he filed a protest
b. If the CIR issues an assessment notice, the taxpayer must
against the assessment on the ground that he did not receive
administratively protest or dispute the assessment by filing
the notice of assessment and that the assessment had
a motion for reconsideration or reinvestigation within 30
prescribed. Will the protest prosper? Explain. (#14, 2000 Bar
days from receipt of the notice of assessment. (4 th
Exams)
paragraph Sec. 228 NIRC of 1997)
Within 60 days from filing of the protest, the taxpayer shall
Suggested Answer:
submit all relevant supporting documents.
No. Prescription has not set in because the period of
limitations for the BIR to issue an assessment was
The judicial remedies of an aggrieved taxpayer relative to suspended during the time that Mr. Reyes was out of the
an assessment notice are as follows: Philippines or from the period December 15, 1995 up to
December 8, 1998 (Sec. 223 in relation to Sec. 203, both
a. Where the CIR has not acted on the taxpayers protest of the NIRC of 1997)
within a period of 180 days from submission of all relevant
documents, then the taxpayer has a period of 30 days from
the lapse of said 180 days within which to interpose a ----------------------------------------------------------
petition for review with the CTA.
b. Should the CIR deny the taxpayers protest, then he has a
162. On June 16, 1997, the BIR issued against
period of 30 days from receipt of said denial within which to
the estate of Jose dela Cruz, a notice of deficiency estate tax
interpose a petition for review with the CTA.
assessment, inclusive of surcharge, interest and compromise
In both cases, the taxpayer must apply with the CTA
penalty. The Executor of the Estate filed a timely protest against
for the issuance of an injunctive writ to enjoin the BIR from
the assessment and requested for waiver of the surcharge,
collecting the disputed tax during the pendency of the
interest and penalty. The protest was denied by the CIR with
proceedings.
finality on September 13, 1997. Consequently, the Executor
The adverse decision of the CTA is appealable to the was made to pay the deficiency assessment on October 10,
CA by means of petition for certiorari within a period of 15 1997. The following day, the Executor filed a Petition with the
days from receipt of the adverse decision, extendible for CTA, praying for the refund of the surcharge, interest and
another period of 15 days for compelling reasons, but the compromise penalty. The CTA took cognizance of the case and
extension is not to exceed a total of 30 days in all. ordered the CIR to make a refund. The Commissioner filed a
Petition for Review with the CA assailing the jurisdiction of the
The adverse decision of the CA is appealable to the CTA and the Order to make refund to the Estate on the ground
SC by means of a petition for review on certiorari with a that no claim for refund was filed with the BIR. (a) Is the stand
period of 15 days from receipt of the adverse decision of of the Commissioner correct? Reason.; (b) Why is the filing of
the CA. an administrative claim with the BIR necessary? (#11, 2000 Bar
The employment by the BIR of any of the Exams)
administrative remedies for the collection of the tax like
distraint, levy, etc. may be administratively appealed by the Suggested Answer:
taxpayer to the Commissioner whose decision is (a) Yes. There was no claim for refund or credit that
appealable to the CTA under other manner arising under has been duly filed with the CIR which is required before a suit
the provisions of the NIRC. The judicial appeals start with or proceeding can be filed in any court (Sec. 229 NIRC of 1997)
the CTA, and continues in the same manner as shown The denial of the claim by the Commissioner is the one which
above. will vest the CTA jurisdiction over the refund case should the
Should the BIR decide to utilize its judicial tax taxpayer decide to appeal on time.
remedies for collecting the taxes by means of an ordinary (b) The filing of an administrative claim for refund
suit filed with the regular courts for the collection of a sum with the BIR is necessary in order:
of money, the taxpayer could oppose the same going up 1. To afford the CIR an opportunity to consider the claim
the ladder of the judicial processes from the MTC (as the and to have a chance to correct the errors of
case may be) to the RTC, to the CA, thence to the subordinate officers (Gonzales v. CTA, et. al. 14
Supreme Court. SCRA 79) and
2. To notify the Government that such taxes have been
The remedies of an aggrieved taxpayer on a claim for questioned and the notice should be borne in mind in
refund is to appeal to the adverse decision of the estimating the revenue available for expenditures
Commissioner to the CTA in the same manner outlined (Bermejo v. Collector, GR No. L-3028, July 29, 1950)
above.
----------------------------------------------------------
TAX LAW REVIEWER
1993, it paid the second quarterly income tax of P0.5 million.

The third quarter resulted in net loss, and no tax was paid. Fro
163. Under what conditions may the the fourth and final return for 1993, the company reported a net
Commissioner of Internal Revenue be authorized to: loss fro the year, and the taxpayer indicated in the income tax
a) Compromise the payment of any internal revenue return that it opted to claim a refund of the quarterly income tax
tax? payments.
b) Abate or cancel a tax liability? (#16, 2000 Bar On 10 January 1994, the corporation filed with the
Exams) Bureau of Internal Revenue a written claim fro the refund of
P3.5 million.
Suggested Answer: BIR filed to act on the claim fro refund; hence, on 02
march 1996, the corporation filed fro a petition fro review the
Court of Tax Appeals on its claim fro refund of the over payment
(a) The CIR may be authorized to compromise the payment of of its 1993 quarterly income tax. BIR, in its answer to petition,
any internal revenue tax where: alleged that the claim for refund was filed beyond the
1. A reasonable doubt as to the validity of the claim parliamentary period.
against the taxpayer exists; or
2. The financial position of the taxpayer demonstrates a Did the claim for refund prescribed? (#15,
clear inability to pay the assessed tax. 1997 Bar Exams)
(b) The CIR may abate or cancel a tax liability when:
1. The tax or any portion thereof appears to be unjustly Suggested Answer:
or excessively assessed; or
2. The administration and collection costs involved do
not justify the collection of the amount due. (Sec. 204 The claim for refund has prescribed. The counting of
(B) NIRC of 1997) 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 adjustments return or annual
income tax return was filed (CIR v. TMX Sales Inc., G.R. No.
83736, January 15, 1993; CIR v. Philam Life Insurance Co., Inc.,
G.R. No. 105208, May 25, 1995). It is obvious that the annual
164. A domestic corporation failed to withhold income tax return was filed before January 10, 1994 because
and remit the tax on income received from Philippine sources by the written claim for refund was filed with BIR on January 10,
a non-resident foreign corporation. In addition to the civil 1994. Since the two year prescriptive period is not only a
penalties provided for under the Tax Code, a compromise limitation of action for bringing the case to the judicial stage, the
penalty was imposed for violation of the withholding tax petition for review filed with the CTA on March 02, 1996 is
provisions. May the CIR legally enforce the collection of beyond the reglementary period.
compromise penalty? (# 5, 2000 Bar Exams)
----------------------------------------------------------
Suggested Answer:
No. There is no showing that the compromise penalty 167. An information was filed in court for will full non
was imposed by the CIR with the agreement and payment of income tax the assessment of which has become
conformity of the taxpayer. (Wonder Mechanical final. The accused, through counsel, presented a motion that he
Engineering Corporation v. CTA, 54 SCRA 555) be allowed to compromise his tax liability subject of the
information. The prosecutor indicated his conformity to the
---------------------------------------------------------- motion. Is this procedure correct? (#15, 1998 Bar Exams)
Suggested Answer:
165. May the courts enjoin the collection of
revenue taxes? Explain your answer. (#3b, 2001 Bar Exams) No. Criminal violations, if already filed in court, may
not be compromised (Sec. 24(B), NIRC). Furthermore, the
Suggested Answer: payment of eth tax due after apprehension shall not constitute a
As a general rule, the courts have no authority to valid defense in any prosecution for violation of any provisions
enjoin the collection of revenue taxes. (Sec. 218 NIRC). of the Tax Code (Sec. 247(a), NIRC). Finally, there is a legal
However, the CTA is empowered to enjoin the collection of officer of the BIR to whom the conduct of criminal actions are
taxes through administrative remedies when collection lodge by the Tax Code.
could jeopardize the interest of the government or
taxpayer. (Sec. 11 RA 1125) Alternative answer:
No. If the compromised 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
166. A corporation files its income tax return on a calendar Commission of Internal Revenue or in proper case the
year basis. Evaluation Board of the BIR (Sec. 204, NIRC). Applying the law
to the case at bar, compromise settlement can only be affected
For the first quarter of 1993, it paid on 30 May 1993 its by leave of Court.
quarterly income tax in the amount of P3.0 million. On 20 August
----------------------------------------------------------
TAX LAW REVIEWER
168. May the Commissioner of Internal Revenue

compromise the payment of withholding tax (tax deducted and Suggested Answer:
withheld at source) where the financial position of the taxpayer
demonstrates a clear inability to pay the assessed tax? (#16, I shall immediately file a motion for reconsideration of
1998 Bar Exams) the issuance of the warrant of distraint and levy and seek from
the BIR Commissioner a denial of the protest in clear and
Suggested Answer: equivocal language. This is so because the issuance of a
warrant of distraint and levy is not considered as denial by the
No. A taxpayer who is constituted as withholding agent BIR of the protest filed by CFB Corporation (CIR v. Union
who has deducted and withheld at source the tax on the income shipping Corp., 185 SCRA 547).
payment made by him holds the taxes as trust fund for the
government (Sec. 55(D) and is obligated to remit them to BIR. Within thirty (30) days from receipt of such denial in
The subsequent inability of the withholding agent to pay/remit clear and unequivocal language, I shall then file a petition for
the tax withheld is a not a ground for compromise because the review with Court of Tax Appeals.
withholding tax is not a tax upon withholding agent but it is only
a procedure for collection of a tax. 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 BIR from enforcing the
169. Is the BIR authorized to issue a warrant of
warrant.
garnishment against the bank account of a taxpayer despite the
pendency of his protest against the assessment with the BIR or
This is the action I shall take because I shall consider
appeal with the Court of Tax Appeals? (#18,1998 Bar Exams)
the issuance of the warrant as a final decision of the
Commissioner of Internal Revenue which could be the subject of
Suggested Answer:
appeal to the Court of Tax Appeal (Yabes v. Flojo, 15 SCRA
278). The CTA may, however, remand the case to the BIR and
The BIR is authorized to issue a warrant of
require the Commissioner to specifically rule to the protest. The
garnishment against the bank account of a taxpayer despite
decision of the Commissioner, if adverse to my client, would
pendency of protest (Yabes v. Flojo, 15 SCRA 279). Nowhere in
then constitute an appeal able decision.
the Tax Code its 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 the taxation that the government depends to
obtain the means to carry on its operations (Republic v. Tim Tian 171. Is assessment necessary before a tax payer may be
Teng Sons, Inc., 16 SCRA 584). prosecuted fro willfully attempting in any manner to evade or
defeat any tax imposed by the Internal Revenue code? (#20,
The Commissioner is not authorized to issue the 1998 Bar Exams)
warrant of garnishment during eth pendency of appeal with the
Court of Tax Appeal because the Assessment is not yet final and Suggested Answer:
unappealable.
No. Assessment is not necessary before a taxpayer
Alternative Answer: maybe prosecuted if there is prima facie showing of a willful
attempt to evade taxes as in the taxpayers failure to declare a
No, because the assessment has not yet become specific item of taxable income in his income tax return (Ungab
final, executory and demandable. The basic consideration in the v. Cusl 97 SCRA 877). On the contrary, if the taxes alleged to
collection of taxes is whether the assessment is final and appeal have been evaded is computed based on reports approved by
able or the decision of the Commissioner is final., executory and the BIR there is a presumption of regularity of eth previous
demandable, the BIR has the legal basis to collect the tax payment of the taxes, so that unless and until the BIR has made
liability by either administrative or judicial action. final determination of what is supposed to be the correct taxes,
the taxpayer should not be placed in the crucible of criminal
---------------------------------------------------------- prosecution (CIR v. Fortune Tobacco Corp.,GR No. 119322,
June 4, 1996).
170. CFB Corporation, a domestic corporation engaged in

----------------------------------------------------------
food processing and other allied activities, received a letter from
the BIR assessing it for delinquency income taxes. CFB filed a
letter of protest. One month after, a warrant of distraint and levy 172.
was served on CFB Corporation. 1.) Compare the taxpayers remedies under the
National Internal Revenue Code and the Tariff and Customs
If you were the lawyer engaged by CFB Corporation to Code.
contest the Assessment made by the BIR, what steps will you
take to protect your client? (#19, 1998 Bar Exams) Suggested Answer:
TAX LAW REVIEWER
incurred under any bond given by the importer in respect to

The taxpayers remedies under the National internal such property shall thereupon be deemed to be discharged.
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
173.
Commissioner on the protest with the court of Tax Appeals,
A) Under Section 2523 of the Tariff and Customs
thereafter to the Court of Appeals and finally with the Supreme
Code, the duty of verifying the correct weight of a cargo
Court.
shipment is imposed upon the vessels master, owner or
The remedy after payment is availed of by paying the
employee. If a discrepancy between the actual gross weight and
assessed tax within 30 days from receipt of assessment and the
declared gross weight of the manisfested cargo exceeds 20%
filing of a claim for refund or tax credit of these taxes on grounds
and the Collector shall be of the opinion that such discrepancy
that they are erroneously paid within two years from date of
was due to the carelessness of incompetency of the master of
payment. If there is a denial of the claim, appeal to the CTA shall
pilot in command, owner or employee of the vessel, a fine not
be made within thirty days from denial but within two years from
more than 15% of the value of the article may be imposed upon
date of payment. If the Commissioner fails to act on the claim
the importing vessel.
for refund or tax credit and the two year period is about to
expire, the taxpayer should consider the continuous inaction of
ABC Corporations vessel was found, after appropriate
the Commissioner as a denial and elevate the case to the CTA
administrative proceedings, to have violated the said provision
before the expiration of the two year period.
far exceeding than 20% statutory limitation. The Collector of
Under the Tariff and Customs Code, taxpayers
Customs imposed a dine of P22,600.00 (representing 15% of
remedies arise only after payment of duties. The administrative
the value of the discrepancy) which was affirmed by the
remedies consist of filing a claim for refund, which may take the
Commissioner of Customs.
form of abatement or drawback. The taxpayer can also file a
protest within 15 days from payment if he disagrees with the
On appeal by ABC Corporation, the Court of Tax
ruling or decision of the Collector of Customs regarding the
Appeals found the fine of P22,600.00 harsh and unreasonable
legality or correctness of the assessment of customs duties. If
for a first offense and reduced the same to P5,000.00.
the decision of the Collector is adverse to the taxpayer, he can
notify the Collector within 15 days from receipt of said decision
The Commissioner of Customs questions the scope of
of his desire to have his case reviewed by the Commissioner.
authority of the Court of Tax Appeals in the determination of the
The decision of the collector on the taxpayers protest, if
fine imposable under Section 2523 of the Tariff and Customs
adverse to the Government, is automatically elevated to the
Code.
Commissioner for review; and if such decision is affirmed by the
Commissioner, the same shall be automatically elevated to and
Whose judgment should prevail under the
finally reviewed by the Secretary of Finance.
circumstances of the case? Explain fully. (#13, 1992 Bar Exams)
Resort to judicial relief can be had by the taxpayer by
appealing the decision of the Commissioner or of the Secretary
Suggested Answer:
of Finance (for cases subject to automatic review0 within 30
days from the promulgation of the adverse decision to the CTA.
The judgment of the Court of Tax Appeals should
prevail.
4.) Discuss briefly the remedies of an importer during the
pendency of seizure proceedings. (#14, 1996 Bar Exams)
The CTA has exclusive appellate jurisdiction over
decision of the Commissioner of Customs in cases involving the
imposition of fines, forfeitures or other penalties.
Suggested Answer:
B) Antonio Cruz was appointed by the Regional Trial
During the pendency of seizure proceedings the
Court as Administrator in the testate proceedings for the
importer may secure the release of the imported property for the
settlement of the estate of his deceased father. On 12 February
legitimate used by posting a bond in an amount to be fixed by
1987, the Commissioner of Internal Revenue issued a
the Collector, conditioned for the payment of the appraised
deficiency estate tax assessment for the estate in question in
value of the article and/ or any fine, expenses and costs which
the amount of P2,816,514.60. The notice of deficiency
may be adjudged in the case; provided, that the articles the
assessment was received by the Administrator on 19 February
importation of which is prohibited by law shall not be released
1987. in his letter to the Commissioner, dated 21 February 1987,
under bond.
which was received by the latters office two (2) days later, the
The importer may also offer to pay to the collector a
Administrator requested for a reconsideration of the assessment
fine imposed by him upon the property to secure its release or in
on the ground that the same is contrary to the law and is not
case of forfeiture, the importer shall offer to pay for the domestic
supported by sufficient evidence. He also requested for a period
market value of the seized article, which offer subject to the
of fifteen (15) days within which to submit the estates position
approval of the Commissioner may be accepted by the Collector
paper.
in settlement of the seizure case, except when there is fraud.
Upon payment of the fine or domestic market value, the property
On 4 August 1988, not having received the promise
shall be forthwith released and all liabilities which may or might
position paper, the Commissioner filed the Court a motion for
attach to the property by virtue of the offense which was the
allowance of claim and for an order of payment of estate taxes,
occasion of the seizure and all liability which might have been
praying therein that the administrator be directed to pay the
BIR the aforementioned deficiency tax. The administrator
TAX LAW REVIEWER
opposed the motion alleging that by reasons of the pendency of

his request for reconsideration, the deficiency assessment has Respondent Commissioner of Internal Revenue
not become final and executory and, therefore, the absence of a argues that Corporation X is not the real party in interest to
decision on the disputed assessment is a bar against collection prosecute a claim for refund of the overpaid taxes of the non-
of taxes. He further argued that it is the Court of Tax Appeals, resident US stockholders, who are the real parties in interest.
and not the Regional Trial Court, which has exclusive jurisdiction But neither could it maintain an action for refund in a
over the claim. representative capacity having failed to show proof of
authorization.
3) Resolve the motion and issues raised. (#12,
1991 Bar Exams) Will Corporation Xs case prosper? Explain. (#12,
1992 Bar Exams)
Suggested Answer: Suggested Answer:

:
Evidently, the request for reconsideration did not
express or specify the grounds therefor. A request for Yes. A subsidiary, while not the real party in interest,
reconsideration in the tenor stated in the problem is insufficient, could prosecute a claim of refund in behalf of its non-resident
not being substantiatled, to stop the running of the 30-day stockholders by virtue of its being the withholding agent for the
period within which the assessment may be disputed (Dayrit vs. government in respect of the cash dividends it declared (Comm.
Cruz, G.R. No. 39919, 26 September 1988). The failure of the vs. Wander Phils.).
taxpayer to submit the promised position paper within the said
30-day period had the effect of rendering the assessment final Alternative Answers:
and executory. In addition, the pendency of a decision on a
disputed assessment does not bar the collection of the NIRC No. The tax is due on the non-resident stockholders.
taxes, and no injunction may be issued by any court (except by The rule is that the refund may be claimed by the taxpayer on
the Court of Tax Appeals as an incident to a timely petition for whom the tax is imposed and who effectively paid the tax.
review). In the absence of a petition 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
175.
thereof (See Sec. 11, RA 1125). Premises considered, the
1. What are the legal remedies of an aggrieved tax payer
action taken by the Commissioner with the Regional Trial Court
both at the administrative and judicial levels? Describe
was appropriate and in accordance with law.
separately the procedures. (#2, 1992 Bar Exams)
Alternative Answer:
Suggested Answer:
a. The administrativ4e and judicial remedies are such
Once a request for reconsideration is made by the
as may be provided for in law imposing the tax. An expression of
taxpayer on an assessment of the BIR within 30 days from the
such remedies in the law should then be deemed exclusive by
receipt thereof, the Commissioner is bound to make a decision
the taxpayer. When the law imposing the tax is silent on
thereon. That decision is the one appealable to the Court of Tax
remedies, the laws and rules of procedure of general application
Appeals. But if the taxpayer does not appeal within the 30 day
shall then govern.
period, the assessment becomes final and executory and
b. Under the NIRC, an aggrieved taxpayer may either
demandable. The implication of this new collect the tax as long
(1) dispute an assessment within thirty (30) days from receipt
as the taxpayer has still the right to appeal from the
thereof by filing with the Commission of Internal Revenue a
Commissioners action.
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 refund within two years
from full and final payment.
174. Corporation X declared cash dividends in favor of its
non-resident stockholders in the United States from which Upon an adverse decision of the Commissioner and
amount, the tax on dividend income was with held. within thirty days from receipt of notice of denial, an appeal may
be filed with the Court of Tax Appeals. However, with respect to
Under the RP-US Tax Treaty, deductions allowed as claims for refunds, an appeal must also be filed within two years
tax on dividends earned at source were fixed at lower rates from the date of full and final payment.
giving rise to overpayment of the tax on dividends paid to the
non-resident US stockholders (representing the difference From the decision of the Court of Tax Appeals, an
between the amount of withholding tax paid and the amount appeal for petition for review by certiorari may be taken to the
supposed to have been withheld under the mentioned tax Court of Appeals and then to the Supreme Court in appropriate
covenant). cases.
Corporation X filed a claim for refund of said 2. Distinguish between a taxpayers remedies in connection
overpayment with the Commissioner of Internal Revenue within with his tax assessment and/or demand and his claim for refund
the prescribed period which however, remained unacted upon, of taxes alleged to have been erroneously or illegally collected.
and before the expiration of the two (2) year reglementary
period, it filed a judicial claim for refund with the Court of Tax Suggested Answer:
Appeals.
TAX LAW REVIEWER
A tax assessment becomes final unless it is disputed Suggested Answer:

or contested within 30 days from receipt thereof by the taxpayer.
If the action taken by the Commissioner on the request for The action for the refund was filed in the Court of Tax
reconsideration is unacceptable to the taxpayer, the latter must Appeals on time, in the case of Commissioner v. TMX Sales,
then appeal, by way of Petition for Review to the court of tax Inc. 205 SCRA 184, which is similar to this case, the Supreme
appeals within thirty days from receipt of the decision of the Court ruled that in the case of overpaid quarterly corporate
Commissioner of Internal Revenue. The taxpayer may also opt income tax, the two-year period for filing claims for refund in the
to pay the tax before the finality of the assessment (e.g., within BIR as well as in the institution of as action for refund in the
30 days from receipt of the assessment) and then file within two CTA, the two-year prescriptive period for tax refunds (Sec. 230,
years a written claim for the refund of tax. A denial by a the Tax Code) is counted from the filing of the final adjustment
Commissioner of a claim for refund must be appealed to the return under Sec. 67 of Tax Code, and not from the filing of the
CTA within thirty days from receipt of notice of denial and within quarterly return and payment of the quarterly tax. The CTA
two years from the day of full and final payment. Continued action on March 1, 1988 was clearly within the reglementary
inaction by the Commissioner on claims for refund may thus be two-year period from the filing of the final adjustment return of
taken as a denial appealable to the Court of Tax Appeals, in the corporation on April 15, 1986.
order permit the appeal to be considered or having been made
within the two year mandatory period. ----------------------------------------------------------
3. What are the requisites before a taxpayers request

for reinvestigation may be granted by the BIR? Discuss briefly.
177. On February 13, 1969, X, obtained a loan of
Suggested Answer:
P800,000.00 from the GSIS secured by the mortgage of a
A request for reinvestigation refers to a plea for
parcel of land including its improvements. X failed to pay the
reevaluation of an assessment on the basis of newly discovered
loan. The loan was foreclosed and sold public auction to the
evidence or additional the taxpayer intends to present in the
GSIS as the highest bidder. X failed to redeem the lot and the
reinvestigation.
GSIS consolidated its title to the lot in 1977. In 1977, however,
the GSIS allowed X to repurchase the lot.
Alternative Answer:
After assessment by the City Assessor, the City
He must file a written protest stating his grounds
Treasurer of Manila required X to pay the real estate taxes due
therefore so that his protest could be granted.
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.
4. if the request for reinvestigation is denied, is it
possible or advisable to file a petition for review with any court
X then filed the Regional Trial Court a complaint
or agency as a last resort.
against the City of Manila for a sum of money and/or recovery
of real estate taxes paid under protest. The City questioned the
Suggested Answer:
jurisdiction of the Court. Decide. (#19, 1993 Bar Exams)
A denial of a request for reinvestigation on
Suggested Answer:
assessment partakes the nature of a decision if made by the
Commissioner. In this a case, an with the CTA within thirty days
Section 62 of the Real Property Tax Code provides
from receipt.
that:
Alternative Answer:
Section 62. Payment under protest.-
On the assumption that the denial by the BIR was not
a) When a taxpayer desires for any reason to pay his
made by the Commissioner himself but by the Regional Officer,
tax under protest, he shall indicate the amount or portion thereof
for instance, or that the request for reinvestigation is not on an
he is contesting and such protest shall be annotated on the tax
assessment as yet, then it may not be necessarily constitute a
receipts by writing thereon the words paid under protest. Verbal
decision on a disputed assessment from which an appeal may
protests shall be confirmed in writing, with a statement of the
be made to the Court of Tax Appeals.
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 receipts.
176. XCEL Corporation filed its quarterly income tax return
for the first quarter of 1985 and paid an income tax of b) In the case of payments under protest, the amount
P500,000.00 on May 15, 1985. in the subsequent quarters, or portion of the tax contested shall be held in trust by the
XCEL suffered losses of P1,000,000.00 in its annual income tax treasurer and the difference shall be treated as revenue.
return. After failing to get refund, XCEL filed on March 1, 1988 a
case with the Court of Tax Appeals to recover the P500,000.00 c) In the event that the protest is finally decided in
in taxes paid on May 15, 1985. favor of the government the amount or portion of the tax held in
trust by the treasurer shall accrue to the revenue account, but if
Is the action to recover the taxes filed timely? (#17, the protest shall be decided finally in favor of the protestant, the
1994 Bar Exams) amount or portion of the tax protested or applied as tax credit to
TAX LAW REVIEWER
any other existing or future tax liability of the said protestant.

(Emphasis Supplied). No. Under Section 230 of the NIRC, a suit for the
recovery of tax erroneously or illegally collected cannot be filed
If the owner is not satisfied with the action of the after the expiration of two years from the date of payment of tax
provincial or city assessors in the assessment of his property, he regardless of any supervening cause to claim for refund has
may file an appeal to the Board of Assessment Appeals of the already prescribed.
province or city, within sixty (60) days from the receipt of the
decision ( Section 30 of the Real Property Tax Code). 2. If the retiree is within his legal rights in claiming
refund of the taxes withheld, will the BIR automatically grant his
If the owner is not satisfied with the decision of the claim? Explain your answer. (#1, 1992 Bar Exams)
Board of Assessment Appeals , he may appeal the said decision
to the Central Board of Assessment Appeals within thirty (30) Suggested Answer:
days after the receipt of the decision (Section 34 and 36 of the
Real Property Tax Code). No. Because he must file a written claim.
As enunciated in the case of Victorias Milling Co., Inc.,

vs. Court of Tax Appeals 22 SCRA 1008,1001(1968): 3. Assuming that the BIR denies the claim for refund,
what could be the possible reason or statutory basis for such a
- It is settled in our jurisdiction that where an denial?
assessment is illegal and void, the remedy of the taxpayer, who
has already paid the realty tax under protest, is sue for refund in Suggested Answer:
the competent court of first instance. On the other hand, where
the assessment is merely erroneous, his recourse is to file an The possible reason for a denial would be that the
appeal in the Provincial Board of Assessment Appeals within 60 written claim has already prescribed or that the terminal pay
days from receipt of the assessment. (Underscoring Supplied) leave is not excluded from income tax. Sec. 230, NIRC (supra).
in view of the foregoing, the legal recourse of X is to 4. Discuss the theory of supervening event as it
appeal the decision of the City Treasurer to the Board of applies to claims for refund of erroneously/illegally collected
Assessment appeal, and not to file an action for sum of money taxes. Can the retiree claim a refund under this theory? Explain.
and/or recovery of real estate taxes. Hence, the Regional Trial
Court has jurisdiction over the complaint filed by X. Suggested Answer:
The theory of supervening event expresses that an
Alternative Answers: event which is beyond the control of the parties would allow the
recovery of erroneously or illegally collected taxes provided the
a) The Regional Trial Court has jurisdiction. It has proceeding for such recovery is made within the prescriptive
been held that the regular court have jurisdiction over actions for period from the occurrence of such event.
refund of real estate taxes paid under protest on the ground of
solutio indebiti The theory of supervening event has been abrogated
by Section 230 of the NIRC.
b) The RTC does not have jurisdiction over the matter. Section
30 of PD. No. 464 (The Real Property Tax Code) prescribes the B) Apple Computer Corp. (ACC) is a foreign
proper remedy of the taxpayer. It requires X, who is not satisfied corporation doing business in the Philippines through a local
with the action of the city assessor , to appeal his case to the branch located at Makati, Metro Manila. In 1985, the local
Local Board of Assessment Appeal within sixty days from date branch applied with the Central Bank for authority to remit to
or receipt by X of the written notice denying his request for ACC branch profits amounting P8,000,000.00. After paying the
refund of real property taxes paid. 15% branch remittance tax of P1,200,000.00, the branch office
remitted to ACC the balance of 6,800,000.00. In January 1986,
---------------------------------------------------------- the branch office was advised by its legal counsel that it
overpaid the branch remittance tax since the basis of the
178.
computation thereof should be the amount actually remitted and
A) Mr. Dante Raymundo retired from the government
not the amount applied for. Accordingly, the branch office
service as Director of Land Transportation on January 6, 1985.
applied for a refund in the amount of P180,000.00.
Upon retirement, Mr. Raymundo received, among other benefits,
his terminal leave pay for which the BIR withheld the sum of
If you were the Commissioner of Internal Revenue,
P56,000.00 a week following the date of his retirement.
would you grant the claim for refund? (#3, 1991 Bar Exams)
On October 17, 1991, following the decision of the
Suggested Answer:
Supreme Court that the money values of the accumulated leave
credits/terminal pay is not subject to withholding tax, Mr.
If I were the Commissioner of Internal Revenue, I
Raymundo filed a claim for refund of P56,000.00 with the
would allow the claim for refund. The remittance tax should be
Commissioner of Internal Revenue.
computed on the amount actually remitted ( Marubent
Corporation vs. Commissioner, G.R. No. 76573, 14 September
1.) Is Mr. Raymundo within his rights in claiming a
1989). In the refund of taxes, the claim therefor can be filed
refund of taxes withheld on his terminal leave following the
within two (2) years from the time of payment so long as the tax
Supreme Court decision? (#1, 1992 Bar Exams)
payment was made before an assessment by the Commissioner
has become final (Sec. 230, NIRC).
Suggested Answer:
TAX LAW REVIEWER
Taxation, 1985, pp. 486-87; 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
179. prescriptive period for the BIR to collect taxes started to run only
1) Fitness, Inc. is a domestic corporation engaged in on 10 December 1979, when a final assessment was made by
the manufacture and sale of nutritional products. It pays the BIR reducing the tax due to One Million Five Hundred
royalties to its foreign licensor. After investigation, the BIR on Thousand Pesos (P1,500,000.00). The collection was effected
December 17, 1974, sent a notice of assessment to Fitness, Inc. on 7 February 1980, by issuing a warrant distraint against
for allegedly failing to remit withholding tax at source for the Fitness, Inc. Hence, the action of the BIR to collect the
fourth quarter of 1973 on its royalties. It demanded payment of deficiency taxes was clearly within the three (3)-year
P3,000.000.00. The notice was received by Fitness,Inc on prescriptive period.
December 19, 1974.
b) The right of the BIR to collect the deficiency taxes
On Feruary 8, 1975, Fitness, Inc. through its counsel, has not prescribed, as the prescriptive period is reckoned from
protested the assessment and requested its cancellation or the date of the reduced assessment, which is December 10,
withdrawal on the ground that it lacked factual and legal bases. 1979. The BIR has three (3) years from said date to collect.
On December 10, 1979, the Commissioner of the BIR rendered
a decision reducing the assessment to P1,500,000.00. The reduced assessment is in the nature of a
compromise assessment, the first assessment received by
Fitness, Inc. was not satisfied and on January 18, Fitness, Inc. on December 19, 1974, and protested on February
1980, it filed a petition for review of the decision in the CTA to 8, 1975, having already become final and binding on Fitness.
enjoin the enforcement of the assessment. On February 7, Applying the present provisions of the NIRC, Fitness should
1980, the BIR issued a warrant of distraint against Fitness, Inc. have protested the assessment within thirty (30) days from
The CTA enjoined the collection of the deficiency taxes by virtue receipt of the same. Failing to do so, the assessment became
of the warrant of distraint. It was argued by Fitness, Inc. that the final and was presumably merely compromised. The date of
right of the BIR to collect its alleged deficiency taxes had such compromise assessment should then be the basis for
already prescribed. Rule on the argument. (#17, 1993 Bar computing the prescriptive period of three (3) years.
Exams)
Suggested Answer: 2) On September 19, 1973, the BIR sent a notice of

assessment to X to pay P300,000.00 as forest charges for the
The warrant of distraint was served on the taxpayer year 1970-73. X made partial payment of P100,000.00 on
within the prescribed period (then 5 years, now three (3) years). September 28, 1973. X died in November 1977. On July 29,
In Commissioner v. Wyeth Suaco (202 SCRA 125), the court 1979, the BIR filed in the Testate Estate Proceedings of X, the
ruled that prescriptive period provided by the law to make claim for P200,000.00 the unpaid forest charges left by X, the
collection by distraint by/or levy or by a proceeding in court is administrator of the estate opposed the claim on the ground of
interrupted once a tax payer protests the assessment and prescription. Decide. (#18, 1993 Bar Exams)
requests for its cancellation. Thus, when the taxpayer protested
the assessment on 8 February 1975, the prescriptive period to Suggested Answer:
collect was interrupted and resumed on 10 December 1979.
When the Commissioner issued the warrant of distraint on 7 Where assessment was made, the tax may be
February 1980 it was well within the five-year (now 3 years) collected within five (5) years (now 3 years) from the date of
prescriptive period to collect. assessment (Collection of Internal Revenue v. Pineda, 2 SCRA
401; Umali, Roman A., Reviewer in Taxation, 1985, pp. 486-87;
Alternative Answers: Vitug, Jose C., Compendium of Tax Law and Jurisprudence, 2 nd
Rev., Ed., 1986, p 255).
a) The Bureau of Internal Revenue (BIR) shall assess
internal revenue taxes within three (3) years after the last day In the case at bar, X on the basis of the notice of
prescribed by law for the filling of return, and no proceeding in assessment, voluntarily made a partial payment to the BIR in
court without assessment for the collection of such taxes shall the amount of One Hundred Thousand Pesos (P100,000.00).
be begun after the expiration of such period (Section 203 of the However, it took the BIR almost more than five (5) now three (3)
National Internal Revenue Code [NIRC]. However, this three (3) year period for the collection of taxes. Hence, the claim filed by
year prescriptive period shall be suspended when the taxpayer the BIR against the Estate of X for the payment of Two Hundred
requests for a reinvestigation and which is granted by the Thousand Pesos (P200,000.00) has prescribed.
Commission (Section 224 of NIRC). In case as assessment was
made, the tax may be collected within three (3) years from the Alternative Answers:
date of assessment (Collector of Internal Revenue v. Pineda, 2
SCRA 401; Umali, Roman A, Reviewer in Taxation, 1985, pp. a) The claim has prescribed as the BIR has only three
486-487; Vitug, Jose C..Compendium of Tax Law and (3) years from the date of the assessment to collect.
Jurisprudence, 2nd Rev., Ed., 1989, p. 255). If the taxpayer asks
for a reinvestigation of the assessment and such reinvestigation b) Taxes are money claims that must be filed with the
is made, and on the basis of which the BIR makes another probate court within the period provided for in the Rules of Court
assessment, the three (3)-year period fort he collection is to be (Sections 1 and 2, Rules 86). In case of Domingo v. Garlitos (8
counted from the last assessment (Rep. v. Lopez, 7 SCRA 566; SCRA 443), the court ruled that the claim shall be barred if filed
Rep. v. Acebedo, 22 SCRA 1356; Umali, Roman A., Reviewer in beyond the prescribed period just like any other money claims.
TAX LAW REVIEWER
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 Questions in Taxation 1987-2001

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Bar Questions in Taxation 1987-2001

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1 SAINT LOUIS UNIVERSITY BAR OPERATIONS

Direct Taxes are taxes wherein both the incidence

Suggested Answer: Alternative Answer:

Suggested Answer: (b) Tariffs and Costumes Code It does not

(c) The usual methods of avoiding the occurrence

15. X Corporation was the recipient in 1990 of two tax

No. The withdrawal of tax exemption amounts to a

Yes. The exemption id valid because an executive

Suggested Answer: Alternative Answer:

Suggested Answer: Second Alternative Answer:

23. A Co., a Philippine corporation, is a big manufacturer

22. Four Catholic parishes hired the services of Frank

25. A taxpayer is suspected not to have declared his

Suggested Answer: All criminals violations except those involving fraud,

Mr. Yang should pay the deficiency income tax on or

A Co., the withholding agent of the non-resident

NATIONAL TAXATION ----------------------------------------------------------

Suggested Answer: Depreciation of goodwill is allowed as a deduction

39. HK Co. is a Hong Kong company, which has a duly

Alternative Answer: ----------------------------------------------------------

44. What is meant by Taxable Income? (#10a, 2000 Bar

43. A Co., a Philippine corporation has two divisions

There are two groups of employees to be laid out:

Exclusions are something received or earned by the

c. As to purpose Deductions are allowed to

52. Taxpayers whose only income consists of salaries and

56. X was hired by Y to watch over Ys fishponds with a

60. a. How often does a domestic corporation file income ----------------------------------------------------------

61. In the year 2000, X worked part time as a waitress in a

Suggested Answer: 1. Capital gains are gains realized from the

71. An individual taxpayer who owns a ten (10) doors

5. A domestic Corporation; (#2, 1998 Bar Exams)

Yes. The exchange inherited in 1995 is a tax free

received it from his employer as compensation income. All the

No. Mr. Francisco did not derive any

Suggested Answer: 1.) Yes. Mr. Jacobo derived a taxable income

92. 1) X sold a piece of land to the United Church of Unit A

Alternative Answer: Without going into computations, answer the following

Suggested Answer: Alternative Answer:

The P50,000.00 insurance proceeds is not totally

The same is not subject to income tax since no income

(e) Prizes and awards made primarily in recognition of ----------------------------------------------------------

a) The award of P25,000.00 should be included in Evelyns ----------------------------------------------------------

Assuming the property is an ordinary asset, the expropriation

106. 1) The Filipinas Hospital for Crippled Children is a

2) Xs favorite charity organization is the Philippine

featuring the Austira Boys Choir. X advanced P100,000.00 to Suggested Answer:

On November 10, 1986, the taxpayer filed an

---------------------------------------------------------- 2) Distinguish between the legal concept of taxes

3) Pursuant to the National Internal Revenue Code,

Suggested Answer: Based on the above-mentioned laws and the circumstances

Suggested Answer: ----------------------------------------------------------

The rental value of the room is not taxable. Section

Alternative Answer: Suggested Answer:

114. Mr. Felix dela Cruz, a bachelor resident citizen,

The money paid to please the director is not Suggested Answer:

1. The actual funeral expenses or in an amount equal to five Suggested Answer:

---------------------------------------------------------- 118. On September 10, 1991, A Bank Manager of peoples

Suggested Answer: Alternative Answer:

the shares sold but with a market value of P5,000,000. As

125. An insolvent company had an outstanding obligation

5. Fees for lodging paid by students to Bahay Bahayan

Suggested Answer: ----------------------------------------------------------