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TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

Q & A in Taxation
GENERAL PRINCIPLES
Power of Taxation
1. Justice Holmes once said: The power to tax is not the power to destroy while this Court (the Supreme Court) sits. Descri e the power to tax and its limitations. (!"# $%%% &ar 'xams) Suggested Answer: The power to tax is an inherent power o( the so)erei*nty which is exercised throu*h the le*islature to impose urdens upon su +ects and o +ects within its +urisdiction (or the purpose o( raisin* re)enues to carry out the le*itimate o +ects o( *o)ernment. The underlyin* asis (or its exercise is *o)ernmental necessity (or without it# no *o)ernment can exist nor endure. ,ccordin*ly# it has the roadest scope o( all the powers o( *o)ernment ecause in the a sence o( limitations# it is considered an unlimited# plenary# comprehensi)e and supreme. The two limitations on the power o( taxation are the inherent and constitutional limitations which are intended to pre)ent a use on the exercise o( the otherwise plenary and unlimited power. -t is the Court.s role to see to it that the exercise o( the power does not trans*ress these limitations. ---------------------------------------------------------. /ay a taxpayer who has pendin* claims (or 0,T input credit or re(und# set1o(( said claims a*ainst his other tax lia ilities2 'xplain your answer. (!"# $%%" &ar 'xams) Suggested Answer: 3o. Set1o(( is a)aila le only i( oth o li*ations are li4uidated and demanda le. 5i4uidated de ts are those where the exact amounts ha)e already een determined. -n the instant case# the claim o( the taxpayer (or 0,T re(und is still pendin* and the amount is still to e determined. , (ortiori# the li4uidated o li*ation o( the taxpayer to the *o)ernment cannot# there(ore# e set1o(( a*ainst the unli4uidated claim which the taxpayer concei)ed to exist in his (a)or. ( Philex Mining Corp v. CIR, August 29, 1998) A!ternati"e Answer: 3o. Taxes and claims (or re(und cannot e the su +ect o( set1o(( (or the simple reason that the *o)ernment and the taxpayer are not creditors and de tors o( each other. There is material istin!tion "et#een a tax an a !laim $or re$un . Claims (or re(unds +ust li6e de ts are due (rom the *o)ernments in its corporate capacity# while taxes are due to the *o)ernment in its so)erei*n capacity. (Philex Mining Corp v. CIR, August 29, 1998) ----------------------------------------------------------

#. Distin*uish direct taxes (rom indirect taxes# and *i)e an example (or each one. (!$ # $%%"# !7 "889 &ar 'xams) Suggested Answer: $ire%t Taxes are taxes wherein oth the incidence (or lia ility o( the payments o( the tax) as well as the impact or urden o( the tax (alls on the same person. ,n example o( this tax is income tax where the person su +ect to the tax cannot shi(t the urden o( the tax to another person. Indire%t Taxes& on the other hand# are taxes wherein the incidence o( or the lia ility (or the payment o( the tax (alls on the person ut the urden thereo( can e shi(ted or passed on to another person. 'xample o( this tax is the )alue1added tax. A!ternati"e Answer: , dire%t tax is a tax which is demanded (rom the person who also shoulders the urden o( the tax. 'xample: corporate and indi)idual income tax. ,n indire%t tax is a tax which is demanded (rom a person in the expectation and intention that he shall indemni(y himsel( at the expense o( another# and the urden (inally restin* on the ultimate purchaser or consumer. 'xample: )alue1added tax. ---------------------------------------------------------'. /ay the collection o( taxes e arred y prescription2 'xplain your answer. (!7a# $%%" &ar 'xams) Suggested Answer: :es. The collection o( taxes may e arred y prescription. The prescripti)e periods (or collection o( taxes are *o)erned y the tax law imposin* the tax. Howe)er# i( the tax law does not pro)ide (or prescription# the ri*ht o( the *o)ernment to collect taxes ecomes imprescripti le. ---------------------------------------------------------(. Taxes were *enerally imprescripti le; statutes howe)er# may pro)ide other wise. State the rules that ha)e een adopted on this score y (a) ( ) (c) The 3ational -nternal <e)enue Code; The Tari(( and Costumes Code; and The 5ocal =o)ernment Code (!9# "88> &ar 'xams)

Suggested Answer: The rules that ha)e een adopted on prescription are as (ollows: (a) 3ational -nternal <e)enue Code ? the statute o( limitation (or assessment o( tax i( return is (iled is within three (7) years (rom the last day prescri ed y the law (or the (ilin* o( the return or i( (iled a(ter the last day# within three years (rom the date o( actual (ilin*. -( no return is (iled or the return (iled is (alse or (raudulent# the period to asses is within ten years (rom the disco)ery o( the omission# (raud or (alsity. The period to collect the tax is within three years (rom date o( assessment.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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-n the case# howe)er# o( omission to (ile or i( the return (iled is (alse or (raudulent# the period to collect is within ten years (rom the disco)ery without the need o( an assessment. ( ) Tari((s and Costume Code ? -t does not express any *eneral statute o( limitation; it pro)ided# howe)er# that when the articles ha)e entered and passed (ree o( duty or (inal ad+ustments o( duties made# with su se4uent deli)ery# such entry and passa*e (ree o( duty or settlement o( duties will# a(ter the expiration o( one (") year# (rom the date o( the (inal payment o( duties# in the a sence o( (raud or protest# e (inal and conclusi)e upon all parties# unless the li4uidation o( import entry was merely tentati)e (Sec. "@%7# TCC). (c) 5ocal =o)ernment Code ? 5ocal taxes# (ees or char*es shall e assessed within (i)e (A) years (rom the date they ecome due. -n the case o( (raud or intent to e)ade the payment o( taxes# (ees or char*es the same may e assessed within ten years (rom disco)ery o( (raud or intent to e)ade payment. They shall also e collected either y administrati)e or +udicial action within (i)e (A) years (rom the date o( assessment (Sec. "89 5=C). ---------------------------------------------------------). (") Bhat are the asic (eatures o( the present income tax system2 ($) Bhat is the nature o( the power o( taxation2 (!"#"88@ &ar 'xams) Suggested Answer: ") Cur present income tax system can e said to ha)e the (ollowin* asic (eatures: a.) -t has adopted a comprehensi)e tax situs y usin* the nationality# residence# and source rules. This ma6es resident citiDens and all other taxpayers taxa le on their income deri)ed (rom all sources while non1resident aliens are taxed only on their income deri)ed (rom within the Ehilippines. Domestic corporations are also taxed on uni)ersal income while (orei*n corporations are taxed only on income (rom within. .) The indi)idual income tax system is mainly pro*ressi)e in nature in that it pro)ides *raduated rates o( income tax. Corporations in *eneral are taxed at a (lat rate o( 7$F o( net income. c.) -t has com ined the (eatures o( a schedular and *lo al tax system with respect to indi)idual taxpayers ut has maintained a more *lo al treatment on corporations. $) The power to tax is an attri ute to so)erei*nty and is inherent in the State. -t is a power emanatin* (rom necessity ecause it imposes a necessary urden to preser)e the State.s so)erei*nty (Ehil. =uarantee Co. )s. Commissioner# 51$$%>9# ,pril 7%# "8@A). -t is inherently le*islati)e in nature and character in that the power o( taxation can only e exercised throu*h the enactment o( law. ---------------------------------------------------------*. (") G# a lessor o( a property# pays real estate tax on the premises# a real estate dealer.s tax ased on rental receipts and income tax on the rentals. G claims that this is dou le taxation. Decide.

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

($) -s protest at the time o( payment o( taxesHduty a re4uirement to preser)e the taxpayers. ri*ht to claim a re(und2 'xplain. (!$# "88@ &ar 'xams) Suggested Answer: ") There is no dou le taxation. Dou le taxation means taxin* (or the same tax period the same thin* or acti)ity twice# when it should e taxed ut once# y the same taxin* authority (or the same purpose and with the same 6ind or character o( tax. The real estate tax is a tax on property: The real estate dealer.s tax is a tax on the pri)ile*e to en*a*e in usiness: while the income tax is a tax on the pri)ile*e to earn an income. These taxes are imposed y di((erent taxin* authorities and are essentially o( di((erent 6ind and character ( 0illanue)a )s. City o( -loilo# $@ SC<, A>I). $) Jor taxes imposed under the 3-<C# protest at the time o( payment is 3CT re4uired to preser)e the taxpayers. ri*ht to claim re(und. This is clear under Section $7% o( the 3-<C which pro)ides that a suit or proceedin* may e maintained (or the reco)ery o( national internal re)enue tax or penalty alle*ed to ha)e een erroneously assessed or collected# whether such tax or penalty has een paid under protest or not. Jor duties imposed under the Tari(( and Customs Code# a protest at the time o( payment is re4uired to preser)e the taxpayers. claim (or re(und. The procedure under the TCC is to the e((ect that when a rulin* or decision o( the Collector o( Customs is made where y lia ility (or duties is determined# the party ad)ersely a((ected may protest such rulin* or decision y presentin* to the Collector# at the time when payment is made# or within (i(teen days therea(ter# a written protest settin* (orth his o +ections to the rulin* or decision in 4uestion (Sec. $7%I# TCC). ---------------------------------------------------------+. (") Bhy are tax exemptions strictly constructed a*ainst the taxpayer2 ($) Bhen may a taxpayer.s suit e allowed2 (!9# "88@ &ar 'xams) Suggested Answer: ") Tax exemptions are strictly construed a*ainst the taxpayer ecause such pro)isions are hi*hly dis(a)ored and may almost e said to e odious to the law (/anila 'lectric Company# 0era# @> SC<, 7A"). The exception contained in the tax statutes must e strictly construed a*ainst the one claimin* the exemptions ecause the law does not loo6 with (a)or on tax exemptions they ein* contrary to the li(e1 lood theory which is the underlyin* asis (or taxes. $) , taxpayer.s suit may only e allowed when an act complained o(# which may include a le*islati)e enactment# directly in)ol)es the ille*al dis ursement o( pu lic (unds deri)ed (rom taxation (Eascual )s. Secretary o( Eu lic Bor6s# ""% Ehil. 77"). ----------------------------------------------------------

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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,. Jor (ailure o( Cceanic Company# -nc. (CC',3-C)# to pay de(iciency taxes o( E$% /illion# the Commissioner o( -nternal <e)enue issued warrants o( distraint on CC',3-C.s personal properties and le)ied on its real properties. /eanwhile# the Department o( 5a or throu*h the 5a or ,r iter rendered a decision orderin* CC',3-C to pay unpaid wa*es and other ene(its to its employees. Jour ar*es elon*in* to CC',3-C were le)ied upon y the sheri(( and later sold at pu lic auction. The Commissioner o( -nternal <e)enue (iled a motion with the 5a or ,r iter to annul the sale and en+oin the sheri(( (rom disposin* the proceeds thereo(. The employees o( the CC',3-C opposed the motion contendin* that ,rt. "" o( the 5a or Code *i)es (irst pre(erence to claims (or unpaid wa*es. <esol)e the motion. 'xplain. (!A# "88A &ar 'xams) Suggested Answer: The motion (iled y the Commissioner should e *ranted ecause the claim o( the *o)ernment (or unpaid taxes is *enerally pre(erred o)er the claims o( la orers (or unpaid wa*es. The pro)ision o( ,rticle ""% o( the 5a or code# which *i)es la orer.s claims (or pre(erence applies only in case o( an6ruptcy or li4uidation o( the employer.s usiness. -n the instant case# Cceanic is not under an6ruptcy or li4uidation at the time the warrants o( distraint and le)y were issued hence# the opposition o( the employees is unwarranted (C-< )s. 35<C et. ,l# =.<. 3o. >98@A# 3o)em er 8#"889). ---------------------------------------------------------1-. (") Bhat is the .rin%i.!e o/ mobilia sequuntur personam in income taxation2 (!.$# "889 &ar 'xams) ($) Distin*uish 0s%1edu!ar treat2ent3 /ro2 0g!o4a! treat2ent3 as used in income tax. (!7# "889 &ar 'xams) Suggested Answer: ") Erinciple o( mo"ilia se%uuntur personam in income taxation re(ers to the principle that taxation (ollows the property or person shall e su +ect to the tax.

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

Knder the *lo al system# all income recei)ed y the taxpayer are *rouped to*ether without any deduction as to the type or nature o( the income and a(ter deductin* there(rom expenses and other allowa le deductions are su +ected to tax at (ixed rate. ---------------------------------------------------------11. ") The police power# the power to tax and the power o( eminent domain are inherent powers o( *o)ernment. /ay a tax e )alidly imposed in the exercise o( the police power and not o( the power to tax2 -( your answer is in the a((irmati)e# *i)e an example. (!"# "88" &ar 'xams) Suggested Answer: The police power may e exercised (or the purpose o( re4uirin* licenses (or which license (ees may ha)e to e paid. The amount o( the license (ees (or the re*ulation o( use(ul occupations should only e su((icient to pay (or the cost o( the license and the necessary expense o( police sur)eillance and re*ulation. Jor non1use(ul occupations# the license (ee may e su((iciently hi*h to discoura*e the particular acti)ity sou*ht to e re*ulated. -t is clear (rom the (ore*oin* that the police power may not e exercised y itsel( alone (or the purpose o( raisin* tax. Howe)er# police power may e exercised +ointly with the power o( taxation (or the purpose o( raisin* re)enues. (5utD )s. ,raneta# 8I Ehil. "9I) A!ternati"e Answer: Taxation in)ol)es the power to raise re)enue not only in order to support the existence o( *o)ernment ut li6ewise to carry out le*itimate o +ects o( *o)ernment. ,mon* such le*itimate o +ects are those that police power itsel( can co)er. ,s early as the case o( 5utD )s. ,raneta (8I Ehil. "9I)# the Supreme Court has ruled that the taxation may e used to implement an o +ect o( police power. ,n illustration o( such exercise would e an imposition o( taxes on *am lin*# the rates o( which are made somewhat onerous in order to discoura*e *am lin* instead o( an outri*ht prohi ition thereo( y an exercise o( a police power measure such as y present pro)isions o( the <e)ised Eenal Code. $) Discuss the meanin* and the implementations o( the (ollowin* statement: Taxes are the li(e lood o( *o)ernment and their prompt and certain a)aila ility is an imperious need. Suggested Answer: The phrase# taxes are the li(e lood o( *o)ernment# etc. expresses the underlyin* asis o( taxation which is *o)ernmental necessity# (or indeed# without taxation# a *o)ernment can neither exist nor endure. Taxation is the indispensa le and ine)ita le price (or ci)iliDed society; without taxes# the *o)ernment would e paralyDed. This phrase has een used# (or instance# to +usti(y the )alidity o( the laws pro)idin* (or summary remedies in the collection o( taxes. ,s a conse4uence o( the a o)e rule# an in+unction a*ainst the assessment and collection o( taxes is *enerally withheld y the laws imposin* such taxes. ')en when it is not so# under procedural laws such an in+unction may not e o tained as held in the case o( 0alley Tradin* Co. )s. CJ- (=.<. 3o. 98A$8# 7"

,ccordin* to this maxim# which means mo)a le (ollows the person# the situs o( personal property is the domicile o( the owner. This is merely a (iction o( law and is not allowed to stand in the way o( taxation o( personalty in the place where it has its actual situs and the re4uisite le*islati)e +urisdiction exists. $) Distinction etween :schedular treatment and *lo al Treatment as used in income taxation: Knder a schedular system# the )arious typesHitems o( income (i.e. Compensation; usinessHpro(essional income) are classi(ied accordin*ly and are accorded di((erent tax treatments in accordance with schedules characteriDed y *raduated tax rates. Since these types o( income are treated separately# the allowa le deductions shall li6ewise )ary (or each type o( income.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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/arch "8I8)# where the Supreme Court ruled that the dama*es that may e caused to the taxpayer y ein* made to pay the taxes cannot e said to e as irrepara le as it would e a*ainst the *o)ernment.s ina ility to collect taxes. ----------------------------------------------------------

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

re)enue measures on its own without a ill ori*inatin* (rom the House. &ut once the re)enue ill was passed y the House and sent to the Senate# the latter can pass its own )ersion on the same su +ect matter consonant with the latter.s power to propose or concur with amendments. This (ollows (rom the co ? e4uality o( the two cham ers o( Con*ress. (Tolentino ). Secretary o( Jinance# =< 3o. ""A9AA# Cct. 7%# "88A) ----------------------------------------------------------

1 . To pro)ide means (or reha ilitation and sta iliDation o( the su*ar industry so as to prepare it (or the e)entuality o( the loss o( the 4uota allocated to the Ehilippines resultin* (rom the li(tin* o( K.S. sanctions a*ainst an ,(rican country. Con*ress passes a law increasin* the existin* tax on the manu(acture o( su*ar on a *raduated asis. ,ll collections made under the law are to accrue to a special (und to e sent only (or the purposes enumerated therein# amon* which are to place the su*ar industry in a position to maintain itsel( and ultimately to insure its continued existence despite the loss o( that 4uota# and to a((ord la orers employed in the industry a li)in* wa*e and to impro)e their wor6in* conditions. G# a su*ar planter# (iles a suit 4uestionin* the constitutionality o( the law alle*in* that the tax is not (or a pu lic purpose as the same is ein* le)ied exclusi)ely (or the aid and support o( the su*ar industry. Decide the case. (!$# "88" &ar 'xams) Suggested Answer: The suit (ile y the su*ar planter 4uestionin* the constitutionality o( the su*ar industry sta iliDation measure is untena le. Taxation is no lon*er merely (or raisin* re)enue in support the existence o( *o)ernment ut the power may also e exercised to carry out le*itimate o +ects o( the *o)ernment. -t is a le*itimate o +ect o( *o)ernment to protect its local industries on which the national economy lar*ely depends. Bhere the aim o( the tax measure is to achie)e such a *o)ernmental o +ecti)e# the tax imposition can e said (or pu lic purpose (=aston )s. <epu lic &an6# "AI SC<, @$@). ----------------------------------------------------------

Double Taxation
1'. (a) -s a dou le taxation a )alid de(ense a*ainst the le*ality o( a tax measure2 ( ) Bhen an item o( income is taxed in the Ehilippines and the same income is taxed in another country# is there a case o( dou le taxation2 (c) Bhat are the usual methods o( a)oidin* the occurrence o( dou le taxation2 (!"# "88> &ar 'xams) Suggested Answer: (a) 3o# dou le taxation standin* alone and not ein* (or idden y our (undamental law is not a )alid de(ense a*ainst the le*ality o( a tax measure (Eepsi cola ). Tanawan# @8 SC<, 9@%). Howe)er# i( dou le taxation amounts to a direct duplicate taxation# in that the same su +ect is taxed twice when it should e taxed ut once# in a (ashion that oth taxes are imposed (ro the same purpose y the same taxin* authority# within the same +urisdiction or taxin* district# (or the same taxa le period and (or the same 6ind character o( a tax# then it ecomes le*ally o +ectiona le (or ein* oppressi)e and ine4uita le. ( ) :es# ut it is only a case o( indirect duplicate taxation which is not le*ally prohi ited ecause the taxes are imposed y di((erent taxin* authorities. (c) The usual methods o( a)oidin* the occurrence o( dou le taxation are: ") $) 7) 9) ,llowin* reciprocal exemption either y the law or y treaty; ,llowance o( tax credit (or (orei*n taxes paid; ,llowance o( deduction (or (orei*n taxes paid; <eduction o( Ehilippines tax rate.

1#. The house o( <epresentati)e introduced H& $%%% which en)isions to le)y a tax on )arious transactions. ,(ter the ill was appro)ed y the House# the ill was sent to the Senate as so re4uired y the Constitution. -n the upper House# instead o( a deli eration on the House &ill# the Senate introduces S& I%%% which was its own )ersion o( the same tax. The Senate deli erated on this Senate &ill and appro)ed the same. The House &ill and Senate &ill then consolidated in the &icameral Committee. ')entually# the consolidated &ill was appro)e and sent to the Eresident who si*ned the same. The pri)ate sectors a((ected y the new law 4uestioned the )alidity o( the enactment on the *round that the Constitutional pro)ision re4uirin* that all re)enue ills should ori*inate (rom the House o( <epresentati)es has een )iolated. <esol)e the issue. (!$# "88> &ar 'xams) Suggested Answer: There is no )iolation o( the constitutional re4uirement that all re)enue ills should ori*inate (rom the House o( <epresentati)es. Bhat is prohi ited is (or the Senate to enact

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Tax Exemptions
1(. Distin*uish a tax amnesty (rom a tax exemption. (!$a# $%%" &ar 'xams) Suggested Answer: Tax A2nest5 is an immunity (rom all criminal# ci)il and administrati)e lia ilities arisin* (rom non1payment o( taxes. -t is a *eneral pardon *i)en to all taxpayers. -t applies only to past tax periods# hence o( retroacti)e application. &People v. Castane a, 'R (o. )*+,881, 1998)

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

Tax Exe2.tion is an immunity (rom the ci)il lia ility only. -t is an immunity or pri)ile*e# a (reedom (rom a char*e or urden to which others are su +ected. -t is *enerally prospecti)e in application. ---------------------------------------------------------1). G Corporation was the recipient in "88% o( two tax exemptions oth (rom Con*ress# one law exemptin* the company.s ond issues (rom taxes and the other exemptin* the company (rom the taxes in the operation o( its pu lic utilities. The law extendin* the tax exemptions were re)o6ed y the Con*ress e(ore their expiry dates. Bere the re)ocations Constitutional2 (!7# "88> &ar 'xams) Suggested Answer: :es. The exemptin* statutes are oth *ranted unilaterally y the Con*ress in the exercise o( taxin* powers. Since the taxation is rule and tax exemption# the exception# any tax exemption# unilaterally *ranted can e withdrawn at the pleasure o( taxin* authority without )iolatin* the Constitution. (/actan Ce u -nternational ,irport ). /arcos# =.<. 3o. "$%%I$# Septem er ""# "88@). 3either these were issued y the taxin* authority in contract law(ully entered y it so that their re)ocation would not constitute an impairment o( the o li*ations o( contracts. A!ternati"e Answers: 3o. The withdrawal o( tax exemption amounts to a depri)ation o( property without due process o( law# hence unconstitutional. ---------------------------------------------------------1*. The Constitution exempts (rom taxation charita le institutions# churches# parsona*es or con)ents appurtenant thereto# mos4ues and non1pro(it cemeteries and lands# uildin*s and impro)ements actually# directly an exclusi)ely used (or reli*ious# charita le and educational purposes. /ercy Hospital is a "%%1 ed hospital or*aniDed (or charity patients. Can said hospital claim exemption (rom taxation under the a o)e14uoted constitutional pro)ision2 'xplain. (!I# "88@ &ar 'xams) Suggested Answer: :es# /ercy Hospital can claim exemption (rom taxation under the pro)ision o( the Constitution# ut only with respect to real property taxes pro)ided that such real properties are used actually# directly and exclusi)ely (or charita le purposes. ---------------------------------------------------------1+. The Eresident o( the Ehilippines and the Erime /inister o( Japan entered into an executi)e a*reement in respect o( a loan (acility to the Ehilippines (rom Japan where y it was stipulated that interest on loans *ranted y pri)ate

Japanese (inancial institutions to pri)ate (inancial institutions in the Ehilippines shall not e su +ect to Ehilippine income taxes. -s this exemption )alid2 0alid. (!""# "88$ &ar 'xams) Suggested Answer: :es. The exemption id )alid ecause an executi)e a*reement has the (orce and e((ect o( a treaty under the pro)ision o( the <e)enue Code. Taxation is su +ect to -nternational Comity. A!ternati"e Answers: a) The act o( the tax exemption is an act o( taxation which is inherently le*islati)e. There(ore# a mere executi)e a*reement cannot pro)ide (or a tax exemption. ) 3o. Knder the 3-<C# (or interest on in)estment in the Ehilippines loans to e exempt (rom taxation# such in)estment must ha)e een made y (orei*n *o)ernment1owned or controlled (inancin* institutions or international (inancin* institutions esta lished y *o)ernments. -n the case at ar# the loans would e *ranted y pri)ate Japanese (inancial institutions and there(ore# the interest thereon would not e exempt (rom taxation. C6 -n a loan a*reement etween the Central &an6 o( the Ehilippines (as orrower) and pri)ate international an6 (as lender)# it is stipulated that all payments o( interest y the Central &an6 to the lenders shall e made (ree and clear (rom all Ehilippine taxes which may e imposed thereon. -s the stipulation )alid2 'xplain. Suggested Answer: 3o. The act o( tax exemption is an act o( taxation which is inherently le*islati)e and# there(ore# a mere executi)e a*reement without concurrence y Con*ress# cannot pro)ide (or a tax exemption. A!ternati"e Answer: -t is )alid. The stipulation in the a*reement that the lender shall e made (ree and clear (rom all Ehilippine taxes# simply meant that the Central &an6 will assume the tax lia ility which is not contrary to law# morals# *ood customs# pu lic order or pu lic policy. $6 <o ert Eatterson is an ,merican who (irst arri)ed in the Ehilippines in "889 as a mem er o( the K.S. ,rmed Jorces that li erated the Ehilippines. ,(ter the war# he returned to the Knited States ut came ac6 to the Ehilippines in "8AI and stayed here up to the present. He is presently employed in the K.S. 3a)al &ase# Clon*apo City. Jor the year "8IA# he earned KSL"%#IA@.%%. Sometime in "8I@# the District <e)enue C((ice o( the &ureau o( -nternal <e)enue ser)ed him a notice in(ormin* him that he did not (ile hi s income tax return (or the year "8IA and directin* him to (ile said return in "% days. He re(used to (ile any return claimin* that he is not a resident alien and is there(ore not re4uired to (ile any income tax return. -s Eatterson.s claim correct2 (!@# "88" &ar 'xams)

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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Suggested Answer: Eatterson.s claim is not correct. Bhile Eatterson is exempt (rom income tax# an exemption (rom income tax does not# howe)er# necessary mean an exemption li6ewise (rom the (ilin* o( an income tax return (=arrison )s. Court o( ,ppeals# "I> SC<, A$A). ----------------------------------------------------------

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

Limitations

Kni(ormity in the imposition and Hor collection o( taxes that all taxa le articles# or in 6inds o( property o( the same class shall e taxed at the same rate. The re4uirements o( uni(ormity is compiled with when the tax operates with the same (orce and e((ect in e)ery place where the su +ect o( it is (ound (Churchill ). Conception# 79 Ehil. 8@8). -t does not mean that land# chattels# securities# income# occupation# (ranchises# pri)ile*es# necessities and luxuries shall e assessed at the same rate. Di((erent articles may e taxed at di((erent amount pro)ided that the rate is uni(orm on the same class e)erywhere with all people at all times. ,ccordin*ly# sin*lin* out one particular class (or taxation purposes does not in(rin*e the re4uirement o( uni(ormity. 7irst A!ternati"e Answer: The criteria is met when the tax laws operate e4ually and uni(ormly on all persons under similar circumstances. ,ll persons are treated in the same manner# the condition not ein* di((erent# oth in pri)ile*es con(erred and lia ilities imposed. Kni(ormity in taxation also re(ers to *eo*raphical uni(ormity. Ja)oritism and pre(erences are not allowed. Se%ond A!ternati"e Answer: , tax is deemed to ha)e satis(ied uni(ormity rule when it operates with same (orce and e((ect in e)ery place where the su +ect may e (ound (Ehil. Trust M Co. ). :atco# @8 Ehil. 9$%). ---------------------------------------------------------1. Ji)e years a*o# /ar4ueD# Eeneyra# Jayme# Eosadas and /an*uiat# all lawyers# (ormed a partnership which they named /ar4ueD and Eeneyra 5aw C((ices. The Commissioner o( -nternal <e)enue therea(ter issued <e)enue re*ulation 3o. $1 87 implementin* <.,. >98@ 6nown as the Simpli(ied 3et -ncome Taxation Scheme (S3-TS). <e)enue <e*ulation 3o. $187 pro)ides in part: Sec. @. =eneral Ero(essional Eartnership. The *eneral pro(essional partnership and the partners are co)ered y <.,. >98@. Thus# in determinin* pro(it o( the partnership# only the direct costs mentioned in said law are to e deducted (rom partnership income. ,lso# the expenses paid or incurred y partners in their indi)idual capacities in the practice o( their pro(ession which are not reim ursed or paid y the partnership ut are not considered as direct costs are deducti le (rom his *ross income. ".) /ar4ueD and Eeneyra 5aw C((ices (iled a taxpayer.s suit alle*in* that <e)enue <e*ulation 3o. $187 )iolates the principle o( uni(ormity in taxation ecause *eneral pro(essional partnerships are now su +ect to payment o( income tax and that there is a di((erence in the tax treatment etween indi)iduals en*a*ed in the practice o( their respecti)e pro(essions and partners in *eneral pro(essional partnerships. -s this contention correct2 'xplain. $.) -s <e)enue <e*ulation 3o. $187 now considered as ha)in* adopted a *ross income method instead o( retainin* the net income taxation scheme2 'xplain. (!># "88A &ar 'xams) Suggested Answer:

1,. Knder ,rt. G-0# Sec. 9(7) o( the "8I> Ehilippine Constitution# all re)enues and assets o( non1stoc6# non1pro(it educational institutions# used actually# directly and exclusi)ely (or educational purposes# are exempt (rom taxes and duties. ,re income deri)ed (rom dormitories# canteens and oo6stores as well as interest in%o2e on an6 deposits and yields (rom deposit su stitutes automatically exempt (rom taxation2 'xplain. (!8# $%%% &ar 'xams) Suggested Answer: 3o. The interest income on an6 deposits and yields (rom deposit su stitutes are not automatically exempt (rom taxation. There must e a showin* that the incomes are included in the school.s annual in(ormation return and duly audited (inancial statements to*ether with: ". Certi(ication (rom depository an6s as to the amount o( interest income earned (rom passi)e in)estments not su +ect to the $%F (inal withholdin* tax; $. Certi(ication o( actual# direct# and exclusi)e utiliDation o( said income (or educational purposes; 7. &oard resolution on proposed pro+ect to e (unded out o( the money deposited in an6s or placed in money mar6et placements (-inan!e .r er (o. 1+9*9/, (ovem"er 2+, 199/) which must e used actually# directly and exclusi)ely (or educational purposes; The income deri)ed (rom dormitories# canteens and oo6stores are not also automatically exempt (rom taxation. There is still the re4uirement (or e)idence to show actual# direct and exclusi)e use (or educational purposes. -t is to e noted that the "8I> Ehil. Constitution does not distin*uish with respect to the source or ori*in o( the income. The distinction is with respect to the use which should e actual# direct and exclusi)e (or educational purposes. Conse4uently# the pro)isions o( Sec. 7% o( the 3-<C o( "88># that a non1stoc6 and nonpro(it educational institution is exempt (rom taxation only in respect to income recei)ed y them as such could not a((ect the constitutional tax exemption. Bhere the Constitution does not distin*uish with respect to source or ori*in# the Tax Code should not ma6e distinctions. ----------------------------------------------------------. 'xplain the re4uirement o( uni(ormity as a limitation in the imposition and Hor collection o( taxes. (!"# "88I &ar 'xams) Suggested Answer:

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

".) The contention is not correct. =eneral pro(essional partnerships remain to e a non1taxa le entity. Bhat is taxa le are the partners comprisin* the same and they are o li*ated to report as income their share in the income o( the *eneral pro(essional partnership durin* the taxa le year whether distri uted or not. The S3-TS treat pro(essionals as one class o( taxpayer so that they shall e treated ali6e irrespecti)e o( whether they practice their pro(ession alone or in association with other pro(essionals under a *eneral pro(essional partnership. Bhat are taxed di((erently are indi)iduals and corporations. ,ll indi)iduals similarly situated are taxed ali6e under the re*ulations# there(ore# the principle o( uni(ormity in taxation is not )iolated. Cr the contrary# all the re4uirements o( a )alid classi(ication ha)e een compiled with (Tan )s. del <osario et. al# =.<. 3o. "%8$I8# Ccto er 7#"889). 8N9TE: :nder our .resent tax !aws& t1e SNIT 1ad 4een s%ra..ed6

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

Howe)er# the latter shall e lia le (or income taxes on income (rom operations o( the dormitory located outside the school premises. ----------------------------------------------------------

#. Jour Catholic parishes hired the ser)ices o( Jran6 &inatra# a (orei*n non1resident entertainer# to per(orm (or (our (9) ni*hts at the Jol6 ,rts Theater. &inatra was paid E$%%#%%%.%% a ni*ht. The Earishes earned E"#%%%#%%%.%% which they used (or the support o( the orphans in the city. ,re the (our Catholic Earishes lia le to pay taxes2 Suggested Answer: :es. The (our Catholic parishes are lia le ecause the income recei)ed y them# not ein* income earned as such in the per(ormance o( their reli*ious (unctions and duties# is taxa le income under the last para*raph o( Sec $@# in relation to Sec. $@(e) o( the Tax Code. -n promotin* and operatin* the &inatra Show# they en*a*ed in an acti)ity conducted (or pro(it. ----------------------------------------------------------

$.) 3o. <e)enue <e*ulation 3o. $187 implementin* <, 3o. >98@ ha)e indeed si*ni(icantly reduced the items o( deduction limitin* it to direct costs and expenses or the 9%F o( *ross receipts maximum deduction in cases where the direct costs are di((icult to determine. The allowance o( limited deductions howe)er# is still in consonance with the net income taxation scheme rather than the *ross income method. Bhile it is true that not all the expenses o( earnin* the income mi*ht e allowed# this can well e +usti(ied y the (act that deductions are not matters o( ri*ht ut are matters o( le*islati)e *race. 8N9TE: :nder our .resent NIRC& t1e 9S$ is !i2ited to 1-; o/ gross re%ei.ts and not '-;6

Enforcement
'. , Co.# a Ehilippine corporation# is a i* manu(acturer o( consumer *oods and has se)eral suppliers o( raw materials. The &-< suspects that some o( the suppliers are not properly reportin* their income on their sales to , Co. the C-< there(ore: ". -ssued an access letter to , Co. to (urnish the &-< in(ormation on sales and payments to its suppliers. $. -ssued an access letter to a an6 (G &an6) to (urnish the &-< on deposits o( some suppliers o( , Co. on the alle*ed *round that the suppliers are committin* tax e)asion. , Co.# G &an6 and the suppliers ha)e not een issued y the &-< letter o( authority to examine. , Co. and G &an6 elie)e that the &-< is on a (ishin* expedition and come to you (or counsel. Bhat is your ad)ice2 (!@# "888 &ar 'xams) Suggested Answer: - will ad)ise , Co. and & Co. that the &-< is +usti(ied only in *ettin* in(ormation (rom the (ormer ut not (rom the latter. The &-< is authoriDed to o tain in(ormation (rom other persons other than those whose internal re)enue tax lia ility is su +ect to audit or in)esti*ation. Howe)er# this power shall not e construed as *rantin* the Commissioner the authority to in4uire into an6 deposits. (Sec. A# 3-<C) 1111111111111111111111111111111111111111111111111111111111

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. The Kni)ersity o( &i*aa# a non1stoc6# non1pro(it entity# operates a canteen (or its students and a oo6store inside the campus. -t also operates two dormitories (or its students# one o( which is in the campus. -s the Kni)ersity lia le to pay income taxes (or the operation o( the: ") $) 7) canteen2 oo6store2 Two dormitories2 (! 8# "889 &ar 'xams)

Suggested Answer: ") Jor the operation o( the canteen inside the campus# the income thereon ein* incidental to the operations o( the Kni)ersity as a school# is exempt (,rt. G-0 (9)(7)# Constitution: D'CS <e*ulations 3o. "7>1I># Dec. "@#"8I>). $) Jor the same reasons# the Kni)ersity o( &i*aa is not lia le to pay income taxes (or the operation o( the oo6store# since this is an ancillary acti)ity the conduct o( which is carried out within the school premises. 7) The Kni)ersity o( &i*aa shall not e lia le to pay income taxes (ort the operation o( the dormitory located in the campus (or the same reasons as the (ore*oin*.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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(. /r. Eascual.s income (rom leasin* his property reaches the maximum rate o( tax under the law. He donated one1hal( o( his said property to a non1stoc6# non1pro(it educational institution whose income and assets are actually# directly and exclusi)ely used (or educational purposes# and there(ore 4uali(ied (or tax exemption under ,rt. G-0# Sec. 9(7) o( the Constitution and Sec. 7% (h) o( the Tax Code. Ha)in* thus trans(erred a portion o( his said asset# /r. Eascual succeeded in payin* a lesser tax on the rental income deri)ed (rom his property . -s there tax a)oidance or tax e)asion2 'xplain. (! $a# $%%% &ar 'xams) Suggested Answer: There is tax a)oidance. /r. Eascual has a)oided a le*ally permissi)e alternati)e method to reduce his income tax y trans(errin* part o( his rental income to a tax exempt property. The donation is li6ewise exempt (rom the donor.s tax. The donation is the le*al means employed to trans(er the incidence o( income tax on the rental income. ----------------------------------------------------------

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

$. ,ny taxpayer who has (iled an application (or compromise o( his tax lia ility y means o( (inancial incapacity to pay his tax lia ility (Sec. @(J)# 3-<C). The limited power o( the Commissioner does not con(lict with <, 3o. "9%A ecause the pro)isions o( the Tax Code *rantin* this power is an exception to the Secrecy o( &an6 Deposits 5aw as em odied in a latter le*islation. Jurthermore# in case a taxpayer applies (or an application to compromise the payment o( his tax lia ilities on his claim that his (inancial position demonstrate a clear ina ility to pay the tax assessed# his application shall not e considered unless and until he wai)es in writin* his pri)ile*es under <, 3o. "9%A# and such wai)er shall constitute authority o( eth Commissioner to in4uire into the an6 deposits o( the taxpayer. ---------------------------------------------------------+. (") Bhen is a re)enue tax considered delin4uent2 ($) Bhat constitutes prima (acie e)idence o( (alse or (raudulent return2 (!"># "88I &ar 'xams) Suggested Answer:

). , taxpayer is suspected not to ha)e declared his correct *ross income in his return (iled (or "88>. The examiner re4uested the Commissioner to authoriDe him to in4uire into the an6 deposits o( the taxpayer so that he could proceed with the net worth method o( in)esti*ation to esta lish (raud. /ay the examiner e allowed to loo6 into the taxpayer.s an6 deposits2 -n what cases may the Commissioner or his duly authoriDed representati)e e allowed to in4uire or loo6 into the an6 deposits o( a taxpayer2 (!"># $%%% &ar 'xams) Suggested Answer: 3o# as this would e )iolati)e o( <, 3C. "9%A# the &an6 Deposit Secrecy 5aw. The C-< or his duly authoriDed representati)e may e allowed to in4uire or loo6 into the an6 deposit o( a taxpayer in the (ollowin* cases: a. Jor purposes o( determinin* the *ross estate o( a decedent; . Bhere the taxpayer has (iled an application (or compromise o( his tax lia ility y reason o( (inancial incapacity to pay such tax lia ility and he has executed a wai)er (Sec. @J 3-<C o( "88>) c. Bhere the taxpayer has si*ned a wai)er authoriDin* the C-< or his duly authoriDed representati)e to in4uire into the an6 deposits. ---------------------------------------------------------*. Can the Commissioner o( the -nternal <e)enue in4uire into an6 deposits o( a taxpayer2 -( so# does this power o( the Commissioner con(lict with <, "9%A (Secrecy o( &an6 Deposit 5aw). (!># "88I &ar 'xams) Suggested Answer: The Commissioner o( -nternal <e)enue is authoriDed to in4uire into the an6 deposits o(: ". , decedent to determine his *ross estate;

". , re)enue tax is considered delin4uent when it is unpaid a(ter the lapse o( the last day prescri ed y law (or its payment. 5i6ewise# it could also e considered as delin4uent where an assessment (rom delin4uency tax has ecome (inal and the taxpayer has not paid it within the period *i)en in the notice o( assessment. $. There is prima (acie e)idence o( (alse or (raudulent return when the taxpayer has will(ully and 6nowin*ly (iled it with the intent to e)ade a part or all o( the tax le*ally due (rom him (Kn*a ). Cusl# 8> SC<, I>>). There must appear a desi*n to mislead or decei)e on the part o( the taxpayer# or at least culpa le ne*li*ence. , mista6e# not culpa le in respect o( its )alue would not constitute a (alse return. (Bords and Ehrases# 0ol. "@# pa*e ">7) ---------------------------------------------------------,. ") Distin*uish tax e)asion (rom tax a)oidance.

$) G is the owner o( a residential lot situated at Nuirino ,)enue# Easay City. The lot has an area o( 7%% s4uare maters. Cn June "# "889# "%% s4uare meters o( said lot owned y G was expropriated y the *o)ernment to e used in the widenin* o( Nuirino ,)enue# (or E7%%#%%%.%% representin* the estimated assessed )alue o( said portion. Jrom "88" to "88A# G# who is a usinessman# has not een payin* his income taxes. G is now ein* assessed (or the unpaid income taxes in the total amount o( E"A%#%%%.%%. G claims his income tax lia ility as already een compensated y the amount o( E7%%#%%%.%% which the *o)ernment owes in (or the expropriation o( his property. Decide. (!7# "88@ &ar 'xams) Suggested Answer: ") Tax e)asion is a scheme used outside o( those law(ul means to escape tax lia ility and# when a)ailed o(# it usually su +ects the taxpayer to (urther or additional ci)il or criminal lia ilities. Tax a)oidance# on the other hand# is a tax sa)in* de)ice within the means sanctioned y law# hence le*al.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

$) The income tax lia ility o( G cannot e compensated with the amount owed y the =o)ernment as compensation (or his property expropriated. Taxes are o( distinct 6ind# essence and nature than ordinary o li*ations. Taxes and de ts cannot e the su +ect o( compensation ecause the =o)ernment and G are not mutually creditors and de tors o( each other and a claim (or taxes is not a de t# demand# contract# or +ud*ment as is allowa le to e set o((. (Jrancia )s. -,C# =.<. >@>98#June $I#"8II)

#1. &usinessman Stephen :an* (iled an income tax return (or "887 showin* usiness net income o( E7A%#%%%.%% on which he paid an income tax o( E@"#%%%.%%. a(ter (ilin* the return he realiDed that he (or*ot to include an item o( usiness income in "887 (or EA%#%%%.%%. &ein* an honest taxpayer# he included this income in his return (or "889 and paid the correspondin* income tax thereon. -n the examination o( his "887 return the &-< examiner (ound that Stephen :an* (ailed to report this item o( EA%#%%%.%% and assessed him a de(iciency income tax on this item# plus a A%F (raud surchar*e. ".) $.) -s the examiner correct2 'xplain. -( you were the lawyer o( Stephen :an*# what would you ha)e ad)ised your client e(ore he included in his "889 return the amount o( EA%#%%%.%% as "887 income to a)oid the (raud surchar*e2 'xplain. Considerin* that Stephen :an* had already eeen assessed a de(iciency income tax (or "887 (or his (ailure to report the EA%#%%%.%% income# what would you ad)ise him to do to a)oid the penalties (or tax delin4uency2 'xplain. Bhat would you ad)ise Stephen :an* to do with re*ard to the income tax he paid (or the EA%#%%%.%% in his "889 return2 -n case your remedy (ails# what is your other recourse2 'xplain. (!"7# "88A &ar 'xams)

---------------------------------------------------------#-. return. ") Distin*uish a (alse return (rom a (raudulent

$) 'xplain the extent o( the authority o( the Commissioner o( -nternal <e)enue to compromise and a ate taxes2 (!># "88@ &ar 'xams) Suggested Answer: ") The distinction etween a (alse return and a (raudulent return is that the (irst merely implies a de)iation (rom the truth or (act whether international or not# whereas the second is intentional and deceit(ul with the sole aim o( e)adin* the correct tax due (,Dnar )s. Commissioner# 51$%A@8# ,u*ust $7#"8>9). A!ternati"e Answer: ") , (alse return contains de)iations (rom the truth# which may e due to mista6es# carelessness or i*norance o( the person preparin* the return. , (raudulent return contains an intentional wron* doin* with the sole o +ect o( a)oidin* the tax and it may consist in the intentional under declaration o( income# intentional o)er declaration o( deduction or recurrence o( oth. , (alse return is not necessarily tainted with (raud ecause the (raud contemplated y law is actual and not constructi)e. ,ny de)iation (rom the truth on the other hand# whether intentional or not constitutes (alsity# (,Dnar )s. Commissioner# 51$%A@8# ,u*ust $7# "8>9) $) The authority o( the Commissioner to compromise encompasses oth ci)il and criminal lia ilities o( the taxpayer. The ci)il compromise is allowed only in cases (a) where the tax assessment is a dou t(ul )alidity# or ( ) when the (inancial position o( the taxpayer demonstrates a clear ina ility to pay the tax. The compromise o( the tax lia ility is possi le at any sta*e o( liti*ation su +ect to the (ollowin* minimum amounts: a) Jor cases o( (inancial incapacity# a minimum compromise rate e4ui)alent to ten percent ("%F) o( the asic assessed tax# ) Jor other cases# a minimum compromise rate e4ui)alent to (orty percent (9%F) o( the asic assessed tax. ,ll criminals )iolations except those in)ol)in* (raud# can e compromised y the Commissioner ut only prior the (ilin* o( the in(ormation with the Court. The Commissioner may also a ate or cancel a tax lia ility when (a) the tax or any portion thereo( appears to ha)e een un+ustly or excessi)ely assessed: or ( ) the administrati)e and collection costs in)ol)ed do not +usti(y collection o( the amount due# (Sec. $%9# 3-<C). ----------------------------------------------------------

7.)

9.)

Suggested Answer: $.) The examiner is correct in assessin* a de(iciency income tax (or taxa le year "887 ut not in imposin* the A%F (raud surchar*e. The amount o( all items o( *ross income must e included in *ross income durin* the year in which recei)ed or realiDed (Sec.7I# 3-<C). The A%F (raud surchar*e attaches only i( a (alse or (raudulent return is will(ully made y /r. :an* (Sec. $9I# 3-<C). The (act that /r. :an* included the income in his "889 return elies any claim o( will(ulness ut is rather indicati)e o( an honest mista6e which was sou*ht to e recti(ied y a su se4uent act# that is the (ilin* o( the "889 return. 7.) /r. :an* should ha)e amended his "887 income tax return to allow (or the inclusion o( the EA%#%%%.%% income durin* the taxa le period it was realiDed. 9.) /r. :an* should (ile a protest 4uestionin* the A%F surchar*e and as6 (or the a atement thereo(. A!ternati"e Answer: /r. :an* should pay the de(iciency income tax on or e(ore the day prescri ed (or its payment per notice o( demand. ,(ter payment and within two years therea(ter# he should (ile a claim (or re(und o( taxes erroneously paid to reco)er the excessi)e surchar*e imposed. A.) /r. :an* should (ile a written claim (or re(und with the Commissioner o( -nternal <e)enue o( the taxes paid on the EA%#%%%.%% income included in "889 within two years (rom payment pursuant to section $%9(7) o( the Tax Code. Should this remedy (ail in the administrati)e le)el# a +udicial claim (or

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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re(und can e instituted e(ore the expiration o( the two year period. ----------------------------------------------------------

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

without deductions o( these corporations# this is chan*in* the amount o( the tax as said amount ultimately depends on the taxa le ase. ----------------------------------------------------------

# . ") Bhat is a de(iciency interest (or purposes o( the income tax2 -llustrate. $) Bhat is a delin4uency interest (or purposes o( the income tax2 -llustrate. (!"9# "88A &ar 'xams) Suggested Answer: ".) De(iciency interest (or purposes o( the income tax is the interest due on any amount o( tax due or installment thereo( which is not paid on or e(ore the date prescri ed (or its payment computed at the rate o( $%F per annum (rom the date prescri ed (or its payment until it is (ully paid. -( (or example a(ter the audit o( the oo6s o( G:O Corp. (or taxa le year "887 there was (ound to e due a de(iciency income tax o( E"$A#%%%.%% inclusi)e o( the $AF surchar*e imposed under Section $9I o( the Tax Code# the interest will e computed on the E"$A#%%%.%% (rom ,pril "A# "889 up to its date o( payment. $.) Delin4uency interest is the interest o( $%F re4uired to e paid in case o( (ailure to pay: a.) the amount o( the tax due on any return re4uired to e (iled: or .) the amount o( the tax due (or which return is re4uired: or c.) the de(iciency tax or any surchar*e or interest thereon# on the due date appearin* in the notice and demand o( the Commissioner o( -nternal <e)enue. -( in the a o)e illustration the assessment notice was released on Decem er 7"#"889 and the amount o( de(iciency tax# inclusi)e o( surchar*e and de(iciency interest were computed up to January 7%#"88A which is the due date (or payment per assessment notice; (ailure to apy on this latter date will render the tax delin4uent and will re4uire the payment o( delin4uency interest.

#'. Eursuant to the 3ational -nternal re)enue Code and under existin* rules and re*ulations# the Commissioner o( -nternal re)enue is clothed with the authorityHpower to e)aluate (acts o( tax cases and issue assessmentsHdemands a*ainst a taxpayer (or de(iciency taxes. ". -( an <TC +ud*e# on motion o( an in(ormer# renders a decision orderin* the Commissioner to assess and collect (rom the taxpayer certain de(iciency taxes when# in (act the &-< has already ascertained that no de(iciency taxes are due the taxpayer# what proper course o( action would you ad)ise your in(ormer1client to underta6e2 (!9# "88$ &ar 'xams) Suggested Answer: The issue ein* disputed assessment# +urisdiction# i( at all# lies with the Court o( Tax ,ppeals and not with the <TC. The court decision# in my )iew# can not e )oided. - would simply ad)ice my client to pursue the matter administrati)ely. -( the e)idence warrants# - could ha)e the matter in)esti*ated y the Cm udsman. A!ternati"e Answer: - will ad)ice the client to *o to the &-< to (ile an in(ormation under oath so that it may consider any e)idence my client may ha)e in his possession. $. Do you thin6 an action (or mandamus with the <TC can prosper to compel the Commissioner to issue a de(iciency assessment2 Suggested Answer: 3o. -t has een held that the assessment o( taxes is not a ministerial duty compella le y mandamus. -t is a discretionary power )ested y law on the Commissioner o( -nternal re)enue in the exercise o( which the re*ular courts may not inter(ere with. 7. Bhich court acts on: a. Disputed assessments . Tax collection cases (iled y the &-<2 Suggested Answer: a. The CT, exercises exclusi)e appellate +urisdiction o)er disputed assessments: . Tax collection cases (iled y the &-< with re*ular Courts. ----------------------------------------------------------

---------------------------------------------------------##. The Secretary o( Jinance# upon recommendation o( the Commissioner o( -nternal <e)enue# issued a <e)enue <e*ulation usin* *ross income as the tax ase (or corporations doin* usiness in the Ehilippines. -s the <e)enue <e*ulation )alid2 (!"@# "889 &ar 'xams) Suggested Answer: The re*ulation esta lishin* *ross income as the tax ase (or corporations doin* usiness in the Ehilippines (domestic as well as resident (orei*n) is not )alid. This is no lon*er implementation o( the law ut actually it constitutes le*islation ecause amon* the powers that are exclusi)ely within the le*islati)e authority to tax is the power to determine the amount o( the tax. (Sec. " Cooley ">@1"I9). Certainly# i( the tax is limited to *ross income

INC9<E TA=ATI9N

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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#(. , Co.# a Ehilippine corporation# has an executi)e (E) who is a Jilipino citiDen. , Co. has a su sidiary in Hon* Pon* (HP Co.) and will assi*n E (or an inde(inite period to wor6 (ull time (or HP Co. E will rin* his (amily to reside in Hon* Pon* and will lease out his residence in the Ehilippines. The salary o( E will e shouldered A%F y , Co. while the other A%F plus housin*# cost o( li)in* and educational allowances o( E.s dependents will e shouldered y HP Co. , Co. will credit the A%F o( E.s salary to E.s Ehilippine an6 account. E will si*n the contract o( employment in the Ehilippines. E will also e recei)in* rental income (or the lease o( his Ehilippine residence. ,re these salaries# allowances and rentals su +ect to the Ehilippine income tax2 (!""# "888 &ar 'xams) Suggested Answer: The salaries and allowances recei)ed y E are not su +ect to Ehilippine income tax. E 4uali(ies as a non1resident citiDen ecause he lea)es the Ehilippines (or employment re4uirin* him to e physically present a road most o( the time durin* the taxa le year (Sec. $$')# 3-<C). , non1resident citiDen is taxa le only on income deri)ed (rom Ehilippine sources (Sec. $7 3-<C). The salaries and allowances (rom ein* employed a road are incomes (rom without ecause these are compensation (or ser)ices rendered outside the Ehilippines (Sec. 9$# 3-<C). Howe)er# E is taxa le on rental income (or the lease o( his Ehilippine residence ecause this is an income deri)ed (rom within# the leased property ein* located in the Ehilippines (Sec. 9$# 3-<C). ---------------------------------------------------------#). , Co. is the wholly owned su sidiary o( & Co.# a nonresident =erman company. , Co. has a trademar6 licensin* a*reement with & Co. Cn Je ruary "%# "88A# , Co. remitted to & Co. royalties o( E"%#%%%# which , Co. su +ected to a BT o( $AF or E$#A%%. Kpon ad)ice o( counsel# , Co. realiDed that the proper BT rate is "%F. Cn /arch $%# "88@# , Co. (iled a claim (or re(und o( E$#A%% with the &-<. The &-< denied the claim on 3o)em er "A# "88@. Cn 3o)em er $I# "88@# , Co. (iled a petition (or re)iew with the CT,. The &-< attac6ed the capacity o( , Co.# as a*ent to rin* the re(und case. Decide the issue. (!I# "888 &ar 'xams) Suggested Answer: , Co.# the withholdin* a*ent o( the non1resident (orei*n corporation is entitled to claim the re(und o( excess withholdin* tax paid on the income o( said corporation in the Ehilippines. &ein* a withholdin* a*ent# it is the one held lia le (or any )iolation o( the withholdin* tax law should such a )iolation occur. -n the same )ein# it should e allowed to claim a re(und in case o( o)erwithholdin*. &CIR v. 0an er Phils. In!. April 1/, 1988, 1,1 2CRA /345 CIR v. Pro!tor 6 'am"le PMC, 21+ 2CRA 433). ---------------------------------------------------------#*. HP Co. is a Hon* Pon* corporation not doin* usiness in the Ehilippines. -t holds 9%F o( the shares o( , Co.# a Ehilippine company# while the @%F is owned y E Co.# a Jilipino owned Ehilippine corporation. HP Co. also owns "%%F

TAX LAW REVIEWER


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o( the shares o( & Co.# an -ndonesian company which has a duly licensed Ehilippine ranch. Due to worldwide restructurin* o( the HP Co. *roup# HP Co. decided to sell all its shares in , and & Cos. The ne*otiations (or the uy1out and the si*nin* o( the ,*reement o( Sale were all done in the Ehilippines. The ,*reement pro)ides that the purchase price will e paid to HP Co..s an6 account in the KS and that title to , and & Cos. Shares will pass (rom HP Co. to E Co. in Hon* Pon* where the stoc6 certi(icates will e deli)ered. E Co. see6s your ad)ice as to whether or not it will su +ect the payments o( purchase price to BT. 'xplain your ad)ice. (!># "888 &ar 'xams) Suggested Answer: E Co. should not su +ect the payments o( the purchase price to withholdin* tax. Bhile the seller is a non1 resident (orei*n corporation which is not normally re4uired to (ile returns in the Ehilippines# there(ore# ordinarily all its income earned (rom Ehilippine sources is taxes )ia the withholdin* tax system# this is not the procedure a)ailin* with respect to sale o( shares o( stoc6. The !apital gains tax on the sale o$ shares o$ sto!7 o$ a omesti! !orporation is al#a8s re%uire to "e pai through a !apital gains tax return $ile . The sale o( the shares o( stoc6 o( the -ndonesian Corporation is not su +ect to income tax under our +urisdiction ecause the income deri)ed there(rom is considered as a (orei*n1sourced income. A!ternati"e Answer: :es# ut only on the shares o( stoc6s o( , Co. and only on the portion o( the purchase price# which constitutes capital *ains. Knder the Tax Code o( "88># the capital *ains tax imposed under Sec. $I& (Ac) is collecti le )ia the withholdin* o( tax at source pursuant to Sec. A> o( the same Code. ---------------------------------------------------------#+. HP Co. is a Hon* Pon* company# which has a duly licensed Ehilippine ranch# en*a*ed in tradin* acti)ities in the Ehilippines. HP Co. also in)ested directly in 9%F o( shares o( stoc6 o( , Co.# a Ehilippine corporation. These shares are oo6ed in the Head C((ice o( HP Co. and are not re(lected as assets o( the Ehilippine ranch. -n "88I# , Co. declared di)idends to its shareholders. &e(ore remittin* the di)idends to HP Co.# , Co# see6s your ad)ice as to whether it will su +ect the remittance to BT. 3o need to discuss BT rates# i( applica le. Jocus your discussion on what is the issue. (!8# "888 &ar 'xams) Suggested Answer: - will ad)ise , Co. to withhold and remit the withholdin* tax on the di)idends. Bhile the *eneral rule is that a (orei*n corporation is the same +uridical entity as its ranch o((ice in the Ehilippines# when# howe)er# the corporation transacts usiness in the Ehilippines directly and independently o( its ranch# the taxpayer would e the (orei*n corporation itsel( and su +ect to the di)idend tax similarly imposed on non1 resident (orei*n corporation. The di)idends attri uta le to the Home C((ice would not 4uali(y as di)idends earned y a resident (orei*n corporation# which is exempt (rom tax. &Maru"eni Corp. v. Commissioner, 2eptem"er 1+, 1989) ---------------------------------------------------------#,. 'xplain i( the (ollowin* items are deducti le (rom *ross income tax purposes. Disre*ard who is the person claimin* the expense. " ? -nterest on loans used to ac4uire capital

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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e4uipment or machinery. $ ? Depreciation o( *oodwill. (!"$# "888 &ar 'xams) Suggested Answer: ". This is a deducti le item (rom *ross income. The law *i)es the taxpayer the option to claim as a deduction or treat as capital expenditure interest incurred to ac4uire property used in trade# usiness or exercise o( pro(ession. (Sec. 79& (7) 3-<C) $. Depreciation (or *oodwill is not allowed as deduction (rom *ross income. Bhile intan*i le may e allowed to e depreciated or amortiDed# it is only allowed to those intan*i les whose use in the usiness or trade is de(initely limited in duration. &9asilan :states, In!. v. CIR 21 2CRA 13) Such is not the case with *oodwill. A!ternati"e Answer: Depreciation o( *oodwill is allowed as a deduction (rom *ross income i( the *oodwill is ac4uired throu*h capital outlay and is 6nown (rom experience to e o( )alue to the usiness (or only a limited period (Sec. "%># <e)enue <e*ulations 3o. $). -n such case# the *oodwill is allowed to e amortiDed o)er its use(ul li(e to allow the deduction o( the current portion o( the expense (rom *ross income# there y pa)in* the way (or a proper matchin* o( costs a*ainst re)enues which is an essential (eature o( the income tax system. ----------------------------------------------------------

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SAINT LOUIS UNIVERSITY BAR OPERATIONS

, Co. declared di)idends on the pre(erred stoc6 and claimed the di)idends as interest deducti le (rom its *ross income (or income tax purposes. The &-< disallowed the deduction. , Co. maintains that the pre(erred shares with their (eatures are really de t and there(ore the di)idends are really interests. Decide. (!"9# "888 &ar 'xams) Suggested Answer: The di)idends are not deducti le (rom *ross income. Pre$erre shares shall "e !onsi ere !apital regar less o$ the !on itions un er #hi!h su!h shares are issue and there(ore# di)idends paid thereon are not considered interest which are allowed to e deducted (rom the *ross income o( the corporation (<e)enue <e*ulation 3o. ">1>"# July "$# "8>"). ----------------------------------------------------------

' . , Co.# a Ehilippine corporation has two di)isions ? manu(acturin* and construction. Due to the economic situation# it had to close its construction di)ision and lay1o(( the employees in that di)ision. , Co. has a retirement plan appro)ed y the &-<# which re4uires a minimum o( A% years o( a*e and "% years o( ser)ice in the same employer at the time o( retirement. There are two *roups o( employees to e laid o((:

'-. 'xplain i( the (ollowin* items are deducti le (rom *ross income (or income tax purposes. Disre*ard who is the person claimin* the deduction. " ? <eser)es (or ad de ts. $ ? Borthless securities. (!"7# "888 &ar 'xams) Suggested Answer: ". <eser)e (or ad de ts are not allowed as deduction (rom *ross income. &ad de ts must e char*ed o(( durin* the taxa le year to e allowed as deduction (rom *ross income. The mere settin* up o( reser)es will not *i)e rise to any deduction. (Sec. 79' 3-<C). $. Borthless securities# which are ordinarily assets# are not allowed as deduction (rom *ross income ecause the loss is not realiDed. Howe)er# i( these worthless securities are capital assets# the owner is considered to ha)e incurred a capital loss as o( the last day o( the taxa le year and there(ore# deducti le to the extent o( capital *ains. (Sec. 79 D (9) 3-<C). This deduction howe)er# is not allowed to a an6 or trust company (Sec. 79 ' ($) 3-<C). ---------------------------------------------------------'1. , Co.# a Ehilippine corporation issued shares o( stoc6s with the (ollowin* (eatures: ". $. 7. 3on1)otin* Ere(erred and cumulati)e di)idends at the rate o( "%F per annum# whether or not in any period the amount is co)ered y earnin*s or pro+ects; -n the e)ent o( dissolution o( the issuer# holders o( pre(erred stoc6 shall e paid in (ull or rata ly as the assets o( the issuer may permit e(ore any distri ution shall e made to common stoc6holders; and The issuer has the option to redeem the pre(erred stoc6.

a. .

'mployees who are at least A% years o( a*e and has at least "% years o( ser)ice at the time o( termination o( employment. 'mployees who do not meet either the a*e or len*th o( ser)ice , Co. plans to *i)e the (ollowin*: ". Jor cate*ory (,) employees ? the ene(its under the &-< appro)ed plan plus an ex *ratia payment o( the month o( e)ery year o( ser)ice. $. Jor cate*ory (&) employees ? one month (or e)ery year o( ser)ice. 7. Jor oth cate*ories# the cash e4ui)alent o( unused )acation and sic6 lea)e credits. , Co. see6s your ad)ice as to whether or not it will su +ect any o( these payments to BT. 'xplain your ad)ice. (!"%# "888 &ar 'xams)

Suggested Answer: Jor cate*ory , employees# all the ene(its recei)ed on account o( their separation are not su +ect to income tax# hence no withholdin* tax shall e imposed. The ene(its recei)ed under the &-< appro)ed plan upon meetin* the ser)ice re4uirement and a*e re4uirement are explicitly excluded (rom *ross income. The ex *ratia payment also 4uali(ies as an exclusion (rom *ross income ein* in the nature o( ene(it recei)ed on account o( separation due to causes eyond the employee.s control (Sec. 77& 3-<C). The cash e4ui)alent o( unused )acation and sic6 lea)e credits 4uali(ies as part o( separation ene(its excluded (rom *ross income &CIR v. CA .!to"er 13, 1991) Jor cate*ory & employees# all the ene(its recei)ed y them will also e exempt (rom income tax# hence not su +ect to withholdin* tax. These are ene(its recei)ed on account o(

9.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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separation due to causes eyond the employee.s control# which are speci(ically excluded (rom *ross income. (Sec. 7$& 3-<C) A!ternati"e Answer: ,ll o( the payments are not su +ect to income tax and should not also e su +ect to BT. The employees were laid o((# hence# separated (or a cause eyond their control. Conse4uently# the amounts to e paid y reason o( such in)oluntary separation are excluded (rom *ross income# irrespecti)e o( whether the employee at the time o( separation has rendered less then ten years o( ser)ice andHor is elow (i(ty years o( a*e. (Sec. 7$& 3-<C) ---------------------------------------------------------'#. Bhat is meant y Taxa le -ncome2 (!"%a# $%%% &ar 'xams) Suggested Answer: Taxa4!e In%o2e means the pertinent items o( *ross income speci(ied in the Tax Code# less the deductions andHor personal and additional exemptions# i( any# authoriDed (or such types o( income y the Tax Code or other special laws. (Sec. 7" 3-<C o( "88>)

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SAINT LOUIS UNIVERSITY BAR OPERATIONS

He shall e su +ect to an income tax in the same manner as an indi)idual citiDen and a resident alien indi)idual# on taxa le income recei)ed (rom all sources within the Ehilippines. (Sec. $A (,") 3-<C o( "88>) Thus# he is allowed to a)ail o( the itemiDed deductions includin* the personal and additional exemptions ut su +ect to the rule on reciprocity on the personal exemptions (Sec. 79 , to J and / in relation to Sec. $A ," and Sec. 7A (D) o( the same Code) ---------------------------------------------------------'). To start a usiness o( his own# /r. /ario de =uDman opted (or an early retirement (rom a pri)ate company a(ter ten years o( ser)ice. Eursuant to the company.s 4uali(ied and appro)ed pri)ate retirement ene(it plan# he was paid his retirement ene(it which was su +ected to withholdin* tax. -s the employer correct in withholdin* the tax2 'xplain. Knder what conditions are retirement ene(its recei)ed (rom *ross income and exempt (rom taxation2 (!@# $%%% &ar 'xams) Suggested Answer: a) -t depends. ,n employee retirin* under a company.s 4uali(ied and pri)ate retirement plan can only e exempt (rom income tax on his retirement ene(its i( the (ollowin* re4uisites are met: ". That the retirin* employee must ha)e een in ser)ice o( the same employer (or at least ten year; $. That he is not less than A% years o( a*e at the time o( retirement and 7. The ene(it is a)ailed o( only once. -n the instant case# there is no mention whether the employee has li6ewise complied with re4uisites num er $ and 7. ) The conditions to e met in order that retirement ene(its recei)ed y o((icials and employees o( pri)ate (irms are excluded (rom *ross income and exempt (rom taxation are as (ollows: ". Knder <, 3o. 98"> (those recei)ed under a reasona le pri)ate ene(it plan): a. The retirin* o((icial or employee must ha)e een in ser)ice o( the same employer (or at least ten years. . That he is not less than (i(ty years o( a*e at the time o( retirement; and c. That the ene(it is a)ailed o( only once. $. Knder <, 3o. >@9" (those recei)ed (rom employers without any retirement plan): a. Those recei)ed under existin* collecti)e ar*ainin* a*reement and other a*reements are exempt; and . -n the a sence o( retirement plan or a*reement pro)idin* (or retirement ene(its the ene(its are excluded (rom *ross income and exempt (rom income tax i(: i. <etirin* employee must ha)e ser)ed at least (i)e years; and ii. That he is not less than sixty years o( a*e ut not more than sixty (i)e. ---------------------------------------------------------'*. /r. Ja)ier is a non1resident senior citiDen. He recei)es a monthly pension (rom the =S-S# which he deposits

---------------------------------------------------------''. Jose /iranda# a youn* artist and desi*ner# recei)ed a priDe o( E"%%#%%% (or winnin* in the on1the1spot peace poster contest sponsored y a local 5ions Clu . Shall the reward e included in the *ross income o( the recipient (or tax purposes2 'xplain. (!"% # $%%% &ar 'xams) Suggested Answer: 3o. -t is not includi le in the *ross income o( the recipient ecause the same is su +ect to a (inal tax o( $%F the amount thereo( ein* in excess o( E"%#%%% (Sec. $9&(")# 3-<C o( "88>). The priDe constitutes a taxa le income ecause it was made primarily in reco*nition o( artistic achie)ement which he won due to an action on his part to enter the contest. (Sec. 7$& (>)c# 3-<C o( "88>). Since it is an on1the1spot contest# it is e)ident that he must ha)e +oined the contest in order to earn the priDe or award. ---------------------------------------------------------'(. /r. CorteD is a non1resident alien ased in Hon* Pon*. Durin* the calendar year "888# he came to the Ehilippines se)eral times and stayed in the country (or an a**re*ated period o( more than "I% days. How will /r. CorteD e taxed on his income deri)ed (rom sources within the Ehilippines and (rom a road2 (!I# $%%% &ar 'xams) Suggested Answer: /r. CorteD ein* a non1resident alien indi)idual who has stayed (or an a**re*ated period o( more than "I% days durin* the calendar year "888# shall (or that taxa le year e deemed to e a non1resident alien doin* usiness in the Ehilippines.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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with the E3&1/a6ati &ranch. -s he exempt (rom income tax and there(ore not re4uired to (ile an income tax return2 (!># $%%% &ar 'xams) Suggested Answer: /r. Ja)ier is exempt (rom income tax on his monthly =S-S Eension (Sec. 7$& (@() 3-<C o( "88>) ut not on the interest income that mi*ht accrue on the pensions deposited with E3& which are su +ect to (inal withholdin* tax. Conse4uently# since /r. Ja)ier.s sole taxa le income would ha)e een su +ected to a (inal withholdin* tax# he is not re4uired anymore to (ile an income tax return (Sec. A", ($c) 3-<C o( "88>)

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*o)ernment o((icial# the same constitutes a taxa le income. ,ll income (rom le*al or ille*al sources are taxa le a sent any clear pro)ision o( law exemptin* the same. This is the reason why *ross income had een de(ined to include income (rom whate)er source deri)ed. (Sec. 7$, 3-<C). -lle*ally ac4uired income constitutes realiDed income under the claim o( ri*ht doctrine &Rut7in v. ;2, 4+4 ;2 141) ---------------------------------------------------------(-. Distin*uish ,llowa le Deductions (rom Eersonal 'xemptions. =i)e an example o( an allowa le deduction and another example (or personal exemption. (!"%# $%%" &ar 'xams) Su**ested ,nswer:

---------------------------------------------------------'+. 5ast July "$# $%%%# /r. and /rs. Eeter Camacho sold their principal residence situated in Tandan* Sora# NueDon City (or Ten /illion Eesos with the intention o( usin* the proceeds to ac4uire or construct a new principal residence in ,urora Hills# &a*uio City. Bhat conditions must e met in order that the capital *ains presumed to ha)e een realiDed (rom such sale may not e su +ect to capital *ains tax2 (!"7# $%%% &ar 'xams) Suggested Answer: The conditions are: ". The proceeds are (ully utiliDed in ac4uirin* or constructin* a new principal residence within "I calendar months (rom the sale or disposition o( the principal residence or "I months (rom July "$# $%%%. $. The historical cost or ad+usted asis o( the real property sold or disposed shall e carried o)er to the new principal residence uilt or ac4uired. 7. The C-< must ha)e een in(ormed y /r. M /rs. Eeter Camacho within thirty (7%) days (rom the date o( sale or disposition on July "$# $%%% throu*h a prescri ed return o( their intention to a)ail o( the tax exemption. 9. That the said exemption can only e a)ailed o( once e)ery ten ("%) years. A. -( there is no (ull utiliDation o( the proceeds o( sale or disposition# the portion o( the *ain presumed to ha)e een realiDed (rom the sale or disposition shall e su +ect to capital *ains tax (Sec. $9 D$# 3-<C o( "88>) ---------------------------------------------------------Suggested Answer: ',. -n order to (acilitate the processin* o( its application (or a license (rom a *o)ernment o((ice Corporation , (ound it necessary to pay the amount o( E"%%#%%% as a ri e to the appro)in* o((icial. -s the E "%%#%%% deducti le (rom the *ross income o( Corporation ,2 Cn the other hand# is the E "%%#%%% taxa le income o( the appro)in* o((icial2 'xplain your answer. (!"$# $%%" &ar 'xams) Su**ested ,nswer: Since the said amount constitutes a ri e# it is not allowed as a deduction (rom *ross income o( Corporation ,. (Sec. 79,("c) 3-<C). Howe)er# to the recipient ---------------------------------------------------------3o more. =ross compensation income earners are now allowed at least an item o( deduction in the (orm o( premium payments on health andHor hospitaliDation insurance in an amount not exceedin* E$#9%% per annum (sec. 79/). This deduction is allowed i( the a**re*ate (amily income do not exceed E$A%#%%% and y the spouse# in case o( married indi)idual# who claims additional personal exemption (or dependents. T1e distin%tions are as /o!!ows: a. As to a2ount > ,llowa le Deductions *enerally re(er to actual expenses incurred in the pursuit o( trade# usiness or practice o( pro(ession while personal exemptions are ar itrary amounts allowed y law. . As to nature > ,llowa le Deductions constitute usiness expenses while personal exemptions pertain to personal expenses. c. As to .ur.ose > Deductions are allowed to ena le the taxpayer to recoup his cost o( doin* usiness while personal exemptions are allowed to co)er personal (amily and li)in* expenses. d. As to %!ai2ants > ,llowa le Deductions can e claimed y all taxpayers# corporate or otherwise# while personal exemptions can e claimed only y indi)idual taxpayers. ---------------------------------------------------------(1. Taxpayers whose only income consists o( salaries and wa*es (rom their employers ha)e lon* een complainin* that they are not allowed to deduct any item (rom their *ross income (or purposes o( computin* their net taxa le income. Bith the passa*e o( the Comprehensi)e Tax <e(orm ,ct o( "8I># is this complaint )alid2 'xplain your answer2 (!A# $%%" &ar 'xams)

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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( . Distin*uish 'xclusion (rom =ross -ncome (rom Deductions (rom =ross -ncome. =i)e an example o( each. (!@ # $%%" &ar 'xams) Suggested Answer: 'xclusions (rom *ross income re(er to a (low o( wealth to the taxpayer which are not treated as part o( *ross income# (or purposes o( computin* the taxpayer.s taxa le income# due to the (ollowin* reasons: ". -t is exempted y the (undamental law# $. -t is exempted y statute# and 7. -t does not come within the de(inition o( income. (Sec. @"# << 3o. $) Deductions (rom *ross income# on the other hand# are the amounts# which the law allows to e deducted (rom *ross income in order to arri)e at net income. 'xclusions pertain to the computation o( *ross income# while deductions pertain to the computation o( net income. 'xclusions are somethin* recei)ed or earned y the taxpayer which do not (orm part o( *ross income while deductions are somethin* spent or paid in earnin* *ross income. 'xample o( an exclusion (rom *ross income is proceeds o( li(e insurance recei)ed y the ene(iciary upon the death o( the insured which is not an income or "7 th month pay o( an employee not exceedin* E7%#%%% which is an income not reco*niDed (or tax purposes. 'xample o( a deduction is usiness rental. ---------------------------------------------------------(#. Bhat do you thin6 is the reason why cash di)idends# when recei)ed y a resident citiDen or alien (rom a domestic corporation# are taxed only at the (inal tax o( "%F and not at the pro*ressi)e tax rate schedule under Sec. $9(,) o( the Tax Code2 'xplain your answer. (!># $%%" &ar 'xams) Suggested Answer: The reason (or imposin* (inal withholdin* tax rather than the pro*ressi)e tax schedule on cash di)idends recei)ed y a resident citiDen or alien (rom a domestic corporation# is to ensure the collection o( income tax on said income. -( we su +ect the di)idend to the pro*ressi)e tax rate# which can only e done throu*h the (ilin* o( income tax returns# there is not assurance that the taxpayer will declare the income# especially when there are other items o( *ross income earned durin* the year. -t would e extremely di((icult (or the &-< to monitor compliance considerin* the hu*e num er o( stoc6holders. &y shi(tin* the responsi ility to remit the tax to the corporation# it is )ery easy to chec6 compliance ecause there are (ewer withholdin* a*ents compared to the num er o( income recipients.

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5i6ewise# the imposition o( a (inal withholdin* tax will ma6e the tax a)aila le to the *o)ernment at an earlier time. Jinally# the (inal withholdin* tax will e a sure re)enue to the *o)ernment unli6e when the di)idend is treated as a returna le income where the recipient thereo( who is in a tax loss position is *i)en the chance to o((set such loss a*ainst di)idend income there y depri)in* the *o)ernment o( the tax on said di)idend income. ---------------------------------------------------------('. Bhat is meant y income su +ect to (inal tax2 =i)e at least two examples o( income o( resident indi)iduals that is su +ect to the (inal tax2 (!@a# $%%" &ar 'xams) Suggested Answer: -ncome su +ect to (inal tax re(ers to an income wherein the tax due is (ully collected throu*h the withholdin* tax system. Knder this procedure# the payor o( the income withholds the tax and remits it to the *o)ernment as a (inal settlement o( the income tax due on said income. The recipient is no lon*er re4uired to include the item o( income su +ected to (inal tax as part o( his *ross income in his income in his income tax returns. 'xamples o( income su +ect to (inal tax are di)idend income# interest (rom an6 deposits# royalties# etc. ---------------------------------------------------------((. G was hired y : to watch o)er :.s (ishponds with a salary o( E "%#%%%. To ena le him to per(orm his duties well# he was also pro)ided a small hut# which he could use as his residence in the middle o( the (ishponds. -s the (air mar6et )alue o( the use o( the small hut y G a (rin*e ene(it that is su +ect to the 7$F tax imposed y Sec. 77 o( the 3-<C2 'xplain your answer. (!""# $%%" &ar 'xams) Suggested Answer: 3o. G is neither a mana*erial nor a super)isory employee. Cnly mana*erial or super)isory employees are entitled to a (rin*e ene(it su +ect to the (rin*e ene(its tax. ')en assumin* that he is a mana*erial or super)isory employee# the small hut is pro)ided (or the con)enience o( the employer# hence does not constitute a taxa le (rin*e ene(it. (Sec. 77 3-<C) ---------------------------------------------------------(). ,# a doctor y pro(ession sold in the year $%%% a parcel o( land which he ou*ht as a (orm o( in)estment in "88% (or E "/. The land was sold to &# his collea*ue# at I%%#%%% which was then the (air mar6et )alue o( the land. He used the proceeds to (inance his trip to the KS. He claims that he should not e made to pay the @F (inal tax ecause he did not ha)e any actual *ain on the sale. -s his contention correct2 Bhy2 (!I# $%%" &ar 'xams)

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

),
Suggested Answer: 3o. The @F capital *ains tax on sale o( real property held as capital asset is imposed on the income presumed to ha)e een realiDed (rom the sale which is the (air mar6et )alue or sellin* price thereo(# whiche)er is hi*her (Sec. $9D 3-<C). ,ctual *ain is not re4uired (or the imposition o( the tax ut it is the *ain y (iction o( law which is taxa le. ---------------------------------------------------------(*. Bhat is the rationale o( the law in imposin* what is 6nown as the /inimum Corporate -ncome Tax on Domestic Corporations2 (!8a# $%%" &ar 'xams) Suggested Answer: The imposition o( the /C-T is desi*ned to (orestall the pre)ailin* practice o( corporations o( o)er claimin* deductions in order to reduce their income tax payments. The (ilin* o( income tax returns showin* a tax loss e)ery year *oes a*ainst the usiness moti)e which impelled the stoc6holders to (orm the corporation. This is the reason why domestic corporations (and resident (orei*n corporations) a(ter the reco)ery period o( (our years (rom the time they commence usiness operations# they ecome lia le to the /C-T whene)er this tax imposed at $F o( *ross income exceeds the normal corporate income tax imposed on net income. ----------------------------------------------------------

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exempted (rom /C-T ecause it is only on its third year o( operations (ollowin* its commencement o( usiness operations. ---------------------------------------------------------(,. a. How o(ten does a domestic corporation (ile income tax return (or income earned durin* a sin*le taxa le year2 'xplain the process. . Bhat is the reason (or such procedure2 (!9# $%%" &ar 'xams) Suggested Answer: a. , domestic corporation is re4uired to (ile income tax returns (our (9) times (or income earned durin* a sin*le taxa le year. Nuarterly returns are re4uired to e (iled (or the (irst three 4uarters where the corporation shall declare its 4uarterly summary *ross income and deductions on a cumulati)e asis (Sec. >7 3-<C). Then# a (inal ad+ustment return is re4uired to e (iled co)erin* the total taxa le income (or the entire year# calendar or (iscal (Sec. >@ 3-<C) . The reason (or this procedure is to ensure the timeliness o( collection to meet the ud*etary needs o( the *o)ernment. 5i6ewise# it is desi*ned to ease the urden on the taxpayer y pro)idin* it with an installment payment scheme# rather than re4uirin* the payment o( the tax on a lump1sum asis a(ter the end o( the year. ----------------------------------------------------------

(+. -s a corporation which is exempted (rom the /C-T automatically exempted (rom the re*ular corporate income tax2 'xplain your answer. (!8 # $%%" &ar 'xams) Suggested Answer: 3o. The /C-T is a proxy (or the normal corporate income tax# not the re*ular corporate income tax paid y a corporation. Jor instance# a proprietary educational institution may e su +ect to a re*ular corporate income tax o( "%F (dependin* on its dominant income)# ut it is exempt (rom the imposition o( /C-T ecause the latter is not intended to su stitute special tax rates. So is with E'O, enterprises# CD, enterprises etc. ( I$ #hat is meant "8 regular in!ome tax is the 42< tax rate impose on taxa"le in!ome o$ !orporations, the ans#er #oul "e in the a$$irmative, "e!ause omesti! !orporations are resi ent $oreign !orporations are either lia"le $or the 2< o$ gross in!ome &MCIT) or 42< o$ net in!ome &the normal !orporate in!ome tax) #hi!hever is higher) A!ternati"e Answer: 3o. , corporation which is exempted (rom the /C-T is not automatically exempted (rom the re*ular corporate income tax. The reason (or this is that /C-T is imposed only e*innin* on the (ourth taxa le year immediately (ollowin* the year in which such corporation commenced its usiness operations. Thus# a corporation may e

)-. -n the year $%%%# G wor6ed part time as a waitress in a restaurant in /e*a /all (rom I am to 9 pm and then as a cashier in a $91hour con)enience store in her nei*h orhood. The total income o( G (or the year (rom the two employers does not exceed her total personal and additional exemptions (or the year $%%%. Bas she re4uired to (ile an income tax return last ,pril2 'xplain your answer. (!"7# $%%" &ar 'xams) Suggested Answer: :es. ,n indi)idual deri)in* compensation concurrently (rom two or more employers at any time durin* the taxa le year shall (ile an income tax return (Sec. A" ,$( )# 3-<C) A!ternati"e Answer: -t depends. ,n indi)idual with pure compensation income is not re4uired to (ile an income tax return when she meets the (ollowin* conditions: ". The total *ross compensation income does not exceed E@%#%%% and $. The income tax has already een correctly withheld# meanin* the tax withheld is e4ual to the tax due. (Sec. A" ,$( ) 3-<C) There is no mention in the pro lem o( the amount o( personal and additional exemption to 4uanti(y how much is that compensation income that did not exceed the personal

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

)and additional personal exemptions. There is no mention# either o( whether or not the employers withheld taxes and that the amount withheld is e4ual to the tax due. Bhether or not she will e re4uired to (ile an income tax return last ,pril "A on the $%%% income will depend on her compliance with the re4uirements o( the law. ---------------------------------------------------------)1. -s a non1resident alien who is not en*a*ed in trade or usiness or in the exercise o( pro(ession in the Ehilippines ut who deri)ed rental income (rom the Ehilippines re4uired to (ile an income tax return on ,pril on the year (ollowin* his receipt o( said income2 -( not# why2 'xplain your answer. (!"9# $%%" &ar 'xams) Suggested Answer: 3o. The income tax on all income deri)ed (rom the Ehilippine sources y a non1resident alien who is not en*a*ed in trade or usiness in the Ehilippines is withheld y the lessee as a Jinal Bithholdin* Tax (Sec. A> (,) 3-<C). The *o)ernment cannot re4uire persons outside o( its territorial +urisdiction to (ile a return. Jor this reason# the income tax on income deri)ed (rom within must e collected throu*h the withholdin* tax system and thus relie)e the recipient o( the income the duty to (ile income tax returns (Sec. A" 3-<C). ---------------------------------------------------------) . (a) Discuss the meanin* o( the =lo al and Schedular systems o( taxation. ( ) To which system would you say that the method o( taxation under the 3ational -nternal <e)enue Code elon*s2 (!A# "88> &ar 'xams) Suggested Answer: (a) , *lo al system o( taxation is one where the taxpayer is re4uired to lump up all items o( income earned durin* a taxa le period and pay under a sin*le set o( income tax rules on these di((erent items o( income. , schedular system o( taxation pro)ides (or a di((erent tax treatment o( di((erent types o( income so that a separate tax return is re4uired to e (iled (or each type o( income and the tax is computed on a per annum or per schedule asis. ( ) The method o( taxation under the 3-<C elon*s to a system which is a partly schedular and partly *lo al. ----------------------------------------------------------

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hisHher due share. The sur)i)in* spouse assumed administration o( the property. 'ach year# the net income (rom the rental property was distri uted to all# proportionately# on which they paid respecti)ely# correspondin* income tax. -n "889# the income tax returns o( the heirs were examined and de(iciency income tax assessment were issued a*ainst each o( them (ro the years "8I8 to "887# inclusi)e# as ha)in* entered into an unre*istered partnership. Bere the assessment +usti(ied2 (!"$# "88> &ar 'xams) Suggested Answer: :es# the assessment were +usti(ied ecause (or income tax purposes# the co ? ownership o( inherited property is automatically con)erted into an unre*istered partnership (rom the moment the said property are used as common (und with intent to produce pro(its (ro the heirs in proportion to their share in the inheritance. Jrom the moment o( such partition# the heirs are entitled already to their respecti)e de(inite shares o( the estate and the income thereo(# (or each o( them to man*e and dispose o( as exclusi)ely his own without the inter)ention o( eth other heirs# and # accordin*ly# he ecomes lia le indi)idually (or all taxes in connection therewith. -( a(ter such partition# he allows his shares to e held in common with his co ? heirs under a sin*le mana*ement to e used with the intent o( ma6in* pro(it there y in proportion to his share# there can e no dou t that# e)en i( no document or instrument (or the purpose# (or tax purposes# at least# an unre*istered partnership is (ormed (5orenDo CQa# et al ). C-<# 9A SC<, >9). A!ternati"e Answer: 3o# the assessment are not +usti(ied. The mere sharin* o( income does not o( itsel( esta lished a partnership a sent any clear intention o( the co ? owners who are only awaitin* li4uidation o( the estate. ---------------------------------------------------------)'. , corporation en*a*ed in real state de)elopment# executed deeds o( sale on )arious su di)ided lots. Cne uyer# a(ter *oin* around the su di)ision# ou*ht a corner lot with a *ood )iew o( surroundin* terrain. He paid E".$ million# and title (or the property was issued. , year later# the )alue o( the lot appreciated to a mar6et )alue o( E".@ million# and the uyer decided to uild his house thereon. Kpon inspection# howe)er# he disco)ered that a hu*e tower antennae had een erected on the lot (ronta*e totally loc6in* his )iew. Bhen complained# the realty company exchan*ed his lot with another corner lot with an e4ual ut with a((ordin* a etter )iew. -s the uyer lia le (or capital *ains tax on the exchan*e o( the lots2 (!I# "88> &ar 'xams) Suggested Answer: :es# the uyer is su +ect to capital *ains tax on the exchan*e o( the lots on the asis o( pre)ailin* (air mar6et )alue o( the property trans(erred at the time o( the exchan*e or the (air mar6et )alue o( the property recei)ed# whiche)er is hi*her (Sec. $" (e)# 3-<C). <eal property transaction su +ect to capital *ains

)#. /r. Santos died in testate in "8I8 lea)in* his spouse and (i)e children as only heirs. The estate consisted o( a (amily home and a (our ? door apartment which was ein* rented to tenants. Bithin the year# an extra +udicial settlement o( the estate was executed (rom the heirs# each o( them recei)in*

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

).
tax are not limited to sales ut also exchan*es o( property unless exempted y a speci(ic pro)ision o( law. A!ternati"e Answer: 3o. the exchan*e is not su +ect to capital *ains tax ecause it is merely done to comply with the intentions o( the parties to the pre)ious contract re*ardin* the sale and ac4uisition o( a property with a *ood )iew. This is a simple su stitution o( the su +ect o( the sale and since the pre)ious transaction was already su +ected to tax# no new tax should e imposed on the exchan*e (&-< <ulin* 3o. $" (e) %A7 ? I8# %%I ? 8A). ---------------------------------------------------------)(. Durin* the year# a domestic corporation deri)ed the (ollowin* items o( re)enue: (a) *ross receipts (rom a tradin* usiness; ( ) interests (rom money placement in the an6s; (c) di)idends (rom its stoc6 in)estments in domestic corporations; (d) *ains (rom stoc6s transactions throu*h the Ehilippine Stoc6 'xchan*e; (e) proceeds under an insurance policy on the loss o( *oods. -n the preparin* the corporate income tax return# what should e the tax treatment on each o( the a o)e items2 (!8# "88> &ar 'xams) Suggested Answer: The *ross receipts (rom tradin* usiness is includi le as an item o( income in the corporate income tax return and su +ect to corporate income tax rate ased on net income. The other items o( re)enue will not e included in the corporate tax return. The interest (rom money mar6et placements is su +ect to a (inal withholdin* tax o( $%F; di)idends (rom domestic corporations are exempt (rom income tax; and *ains (rom stoc6 transactions with Ehilippine Stoc6 'xchan*e are su +ect to transaction tax which is in lieu o( income tax. The proceeds under an insurance policy on the loss o( *oods is not an item o( income ut merely a return o( capital hence not taxa le. A!ternati"e Answer: The *ross receipts (rom tradin* usiness are includi le as an item o( income in the corporate income tax return. 5i6ewise# the *ain or loss realiDed as a conse4uence o( the receipts o( the proceeds under an insurance policy on the loss o( the *oods will e included in the corporate income tax return either as a taxa le *ain or a deducti le loss. The *ain or loss is arri)ed at y deductin* (rom the proceeds o( insurance (amount realiDed) the asis o( the *ood lost (Sec. 79(a)# 3-<C). The net income o( the corporation shall e su +ect to corporate income tax rate o( 7AF. The other items o( re)enue will not e included in the corporate income tax return. The interests (rom money mar6et placements is su +ect to (inal withholdin* tax o( $%F; di)idends (rom domestic corporation are exempt (rom income tax; the *ains (rom stoc6 transactions with the Ehilippine Stoc6 'xchan*e are su +ect to transactions tax which is in lieu o( the income tax. ---------------------------------------------------------)). , achelor was employed y a Corporation , on the (irst wor6in* day o( January "88@ on a part ? time asis with a

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salary o( E7#A%% a month#. He then recei)ed the "7 th month pay. -n Septem er "88@# he accepted another part ? time +o (rom Corporation & (rom which he recei)ed a total compensation o( E"9#A%%.%% (or the year "88@. the correct total taxes were withheld (rom oth earnin*s. Bith the withholdin* taxes already paid# would he still e re4uired to (ile an income tax (or his "88@ income2 (!># "88> &ar 'xams) Suggested Answer: :es# ecause what is exempt (rom (ilin* are those indi)idual who ha)e compensation income not exceedin* E@%#%%% with the taxes correctly withheld only y one employer. -n this case# e)en i( his a**re*ate compensation income (rom oth his employers does not exceed E@%#%%% and that total withholdin* taxes were correctly withheld y his employers.# the (act that he deri)es compensation income concurrently (rom two employers at anytime durin* the taxa le year# does not exempt him (rom (ilin* his income tax return (<, >98># as implemented y << 3o. 9 ? 87). ----------------------------------------------------------

)*. /ar and Joy *ot married in "88%. a wee6 e(ore their marria*e# Joy recei)ed# y way o( donation# a condominium unit worth E>A%#%%% (rom her parents. ,(ter marria*e# some reno)ation were made at a costs o( E"A%#%%%. The spouses were oth employed in "88" y the same company. Cn 7% Decem er "88$# their (irst child was orn# and a second child was orn on %> 3o)em er "887. -n "889# they sold the condominium unit and ou*ht a new unit. Knder the (ore*oin* (acts# what were the e)ents in the li(e o( the spouses that had income tax incidences2 (!"7# "88> &ar 'xams) Suggested Answer: The e)ents in the li(e o( spouses# /ar and Joy# which ha)e income tax incidences are the (ollowin*: (a) Their marria*e in "88% 4uali(ies them to claim personal exemption as married indi)idual; ( ) Their employment in "88" y the same company will ma6e them lia le to the income tax imposed on the *ross compensation income; (c) &irth o( their (irst child in Decem er "88$ would *i)e rise to an additional exemption o( EA#%%% (or taxa le year "88$; 8N9? P+&---6 (d) &irth o( their second child in 3o)em er "887 would li6ewise entitle them to claim additional exemption o( EA#%%% raisin* their additional personal; exemption to E"%#%%% (or taxa le year "887 8P1)&--- i/ 4ased on %urrent rate6; and (e) Sale o( their condominium unit in "889 shall ma6e the spouses lia le to the AF capital *ain presumed to ha)e een realiDed (rom the sale. (N9? );6

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

)/

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---------------------------------------------------------)+. ". Bhat is the di((erence etween capital *ains and ordinary *ains2 (7F) $. Bhat does the term ordinary income include2 (!"%# "88I &ar 'xams) Suggested answer: ". Capital *ains are *ains realiDed (rom the sale or exchan*e o( capital assets# while ordinary *ains re(ers to *ains realiDed (rom the sale or disposition o( ordinary assets. $. The term ordinary income includes any *ain (rom the sale or exchan*e o( property which is not a capital asset. These are the *ains deri)ed (rom the sale or exchan*e o( property su!h as stoc6 in trade o( the taxpayer or other property o( a 6ind which property e included in the in)entory o( the taxpayer i( on hand at the close o( the taxa le year# or property held y the taxpayer primarily (or sale to customers in the course o( his trade or usiness# or property used in trade or usiness o( a character which is su +ect to the allowance (or depreciation# or real property used in trade or usiness o( the taxpayer. (Sec $$ (O) in relation to Sec 78 (,)(")# oth o( the 3-<C). A!ternati"e Answer: The term ordinary income includes income (rom per(ormance o( ser)ices# whether pro(essional or personal# *ains accruin* (rom usiness# and pro(it arisin* (rom the sale or exchan*e o( ordinary assets.

su +ect to withholdin* o( (inal tax ecause the Ehilippines tax and re*ulations could not reach out to (orei*n +urisdictions. ( ) The tax shall e withheld y the <eader.s Di*est or local a*ent who has control o)er the payment o( the priDe. (c) ,ny person re4uired to withhold or who will(ully (alls to withhold# shall# in addition to the other penalties pro)ided under the code# e lia le upon con)iction to a penalty e4ual to the total amount o( tax not withheld (Sec. $A"# 3-<C). -n case o( (ailure to withhold the tax or in the case o( under withholdin*# the de(iciency tax shall e collected (rom the payorHwithholdin* a*ent ("st par.# Sec $.A>R,S# <. <. 3o. $1 8IS. ,ny person re4uired in the Tax Code or y rules and re*ulations to with hold taxes at time or times re4uired y law or rules and re*ulations shall# in addition to other penalties pro)ided y law# upon con)iction e punished y a (ine o( not less than ten thousand pesos (E"%# %%%) and su((er imprisonment o( not less than one (") year ut not more than ten ("%) years ("st par.# Sec. $AA# 3-<C). ---------------------------------------------------------*1. /C =arcia# a contractor who won the id (or the construction o( a pu lic hi*hway# claims as expenses# (acilitation (ees which accordin* to him is standard operatin* procedure in transactions with the *o)ernment. ,re these expenses allowa le as deduction (rom *ross income2 (!"7# "88I &ar 'xams) Suggested Answer: 3o. the alle*ed (acilitation (ees which he claims as standard operatin* procedure in transaction with the *o)ernment comes in the (orm o( ri es or 6ic6 ac6 which are not allowed as deductions (rom *ross income (Sec. 79 (,)(")(c)# 3-<C). ---------------------------------------------------------* . Jrom what sources o( income are the (ollowin* personsH corporations taxa le y the Ehilippine *o)ernment2 ". $. 7. CitiDen o( the Ehilippines residin* there. 3on ? resident citiDen ; ,n indi)idual citiDen o( the Ehilippines who is wor6in* and deri)in* income (rom a road as an o)erseas contract wor6er; ,n alien indi)idual# whether a resident or not o( the Ehilippines; , domestic Corporation; (!$# "88I &ar 'xams)

---------------------------------------------------------),. ,n indi)idual taxpayer who owns a ten ("%) doors apartment with a monthly rental o( E"%# %%% each residential unit# sold this property to another indi)idual taxpayer. -s the seller lia le to pay the capital *ains tax2 (!""# "88I &ar 'xams) Suggested Answer: 3o. The seller is not lia le to pay the capital *ains tax ecause the property sold is an ordinary asset# i.e. real property used in trade or usiness. -t is apparent that the taxpayer is en*a*ed in the real estate usiness# re*ularly rentin* out the ten ("%) doors apartment. ---------------------------------------------------------*-. -s the price o( one million pesos awarded y the <eader.s Di*est su +ect to withholdin* o( (inal tax2 Bho is responsi le (or withholdin* the tax2 Bhat are the lia ilities (or (ailure to withhold such tax2 (!"$# "88I &ar 'xams) Suggested Answer: (a) -t depends. -( the priDe is considered winnin*s deri)ed (rom sources within the Ehilippines# it is su +ect to withholdin* o( (inal tax (Sec. $9(&) in relation to Sec. A>(,)# 3-<C). -( deri)ed (rom sources without the Ehilippines# it is not

9. A.

Suggested Answer: (Section $7# 3-<C o( "88>) ". , citiDen o( the Ehilippines residin* therein is taxa le on all income deri)ed (rom sources within and without the Ehilippines

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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$. 7. , non resident citiDen is taxa le only in income deri)ed (rom sources within the Ehilippines. ,n indi)idual citiDen o( the Ehilippines who is wor6in* and deri)in* income (rom a road as an o)erseas contract wor6er is taxa le only on income (rom sources within the Ehilippines. ,n alien indi)idual# whether a resident or not o( the Ehilippines# is taxa le only on income deri)ed within the Ehilippines. , domestic Corporation is taxa le on all income deri)ed (rom sources within and without the Ehilippines.

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use(ul li(e o( $% years and sal)a*e )alue o( E"%# %%% a(ter its use(ul li(e2 (!@# "88I &ar 'xams) Suggested Answer: ". The proper allowance o( depreciation o( any property used in trade or usiness re(ers to the reasona le allowance (or the exhaustion# wear and tear (includin* reasona le allowance (or o solescence) o( said property. The reasona le allowance shall include# ut not limited to# an allowance computed under any o( the (ollowin* methods: $. The annual depreciation o( the deprecia le (ixed asset may e computed on the strai*ht ? line method which will allow the taxpayer to deduct an annual depreciation o( E9# A%%# arri)ed at y di)idin* the deprecia le )alue (E"%%# %%% ? E"%# %%%) o( E8%# %%% y the estimated use(ul li(e ($% years). ----------------------------------------------------------

9.

A.

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*#. ,rnold# who is sin*le# coha its with 0ilma# who is le*ally married to Oachary. ,rnold and 0ilma ha)e six minor children who li)e and depend upon ,rnold (or their chie( support. The children are not married and not *ain(ully employed. ". Jor income tax purposes# myt ,rnold e considered as head o( (amily2 $. -s ,rnold entitled to deduct (rom his *ross income# an additional exemption (or each o( his ille*itimate child2 (!9# "88I &ar 'xams) Suggested Answer: ". :es. ,n unmarried man who has ille*itimate minor children who li)e with him and depend upon him (or their chie( support is considered as head o( (amily(<< 3o. $ ? 8I implementin* Sec. 7A# 3-<C). $. 3o. ,rnold is only entitled to deduct additional personal exemption (or (our (9) out o( the six (@) ille*itimate children. The maximum num er o( the dependants (ro purposes o( the additional personal exemption is (our# (Sec. 7A# 3-<C). ----------------------------------------------------------

*). Three others inherited in "88$ a parcel o( land )alued (or real estate tax purposes at E7.% million which they held in co ? ownership. in "88A# they trans(erred the property to a newly or*aniDed corporation as their e4uity which was placed at the Donal )alue o( E@.% million. -n exchan*e (or the property# the three others thus each recei)ed shares o( stoc6 o( corporation with a total par )alue o( E$.% million or# alto*ether# a total o( E@.% million. 3o usiness was done y the Corporation and the property remained idle. -n the early part o( "88># one o( the rothers# who was in dire need o( (unds# sold his shares to the two others (or $ million. -s the transaction su +ect to any internal re)enue tax (other than the documentary stamp tax)2 (!"%# "88> &ar 'xams) Suggested Answer: :es. The exchan*e in "88A is a tax (ree exchan*e so that the su se4uent sale o( one o( the rothers o( his shares to the other two ($) rothers in "88> will e su +ect to income tax. This is so ecause the tax ? (ree exchan*e merely de(erred the reco*nition o( income on the exchan*e transaction. The *ain su +ect to income tax in the sale is measured y the di((erence etween the sellin* price o( the shares (E$ /illion) and the asis o( the real property in the hands o( the trans(eror at the time o( exchan*e which is the (air mar6et )alue o( his share in the real property at the time o( inheritance (Sec. 79( )($)# 3-<C). The net *ain (rom the sale o( the shares o( stoc6 is su +ect to the schedular capital *ains tax o( "%F (or the (irst E"%%#%%% and $%F (or the excess thereo( (Sec. $" (d)# 3-<C). A!ternati"e Answer: The exchan*e e((ected in "88A did not 4uali(y as a tax ? (ree exchan*e ecause there is no showin* that the three rothers *ain control o( the corporation y ac4uirin* at least A"F o( the )otin* ri*hts. Since the entire *ain on the exchan*e was pre)iously su +ected to income tax# then# the sale will also e taxa le i( a *ain results there (rom. -n the instant case# the sale will not su +ect to any internal re)enue tax other than the documentary stamp tax# ecause the seller does not realiDe any *ain (rom the sale. The *ain is measured y the di((erence etween the amount realiDed (sellin* price) and the asis o( property. -ncidentally# the asis to him is his share in the )alue o( the property recei)ed at the time o( exchan*e# which is E$

*'. =i)e the re4uisites (or deducti ility o( loss. (!A# "88I &ar 'xams) Suggested Answer: The re4uisites (or deducti ility o( a loss are a) loss elon*s to the taxpayer; ) actually sustained and char*ed o(( durin* the taxa le year; c) e)idenced y a closed and completed transaction; d) not compensated y insurance or other (orms o( indemnity; e) not claim as a deduction (ro estate tax purposes in case o( indi)idual taxpayers; () i( it is a casualty loss it is e)idenced y a declaration o( loss (iled within 9A days with the &-<. ---------------------------------------------------------*(. ". Bhat is the proper allowance (ro depreciation o( any property used in trade or usiness2 $. Bhat is the annual depreciation o( a deducti le (ixed asset with a cost o( E"%%# %%% and an estimated

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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million# an amount# +ust e4ual to the amount realiDed (rom the sale. ---------------------------------------------------------**. G# a multinational corporation doin* usiness in the Ehilippines donated "%% shares o( stoc6 o( said corporation to /r. :# its resident mana*er in the Ehilippines. ".) $.) Bhat is the tax lia ility# i( any# o( G corporation2 ,ssumin* the shares o( stoc6s were *i)en to /r. : in consideration o( his ser)ices to the corporation# what are the tax implications2 'xplain. (!A# "88@ &ar 'xams)

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usiness premises o( said employer (or his con)enience and that the (ree lod*in* is re4uired to e accepted y G as condition (or employment. Ctherwise# G would e taxed on E@#A%%.%%. ---------------------------------------------------------*,. ". G# an employee o( ,&C Corporation died. ,&C Corporation *a)e G.s widow an amount e4ui)alent to G.s salary (or one year. -s the amount considered taxa le income to the widow2 Bhy2 $. ,# an employee o( the Court o( appeals# retired upon reachin* the compulsory a*e o( @A years. Kpon compulsory retirement# , recei)ed the money )alue o( his accumulated lea)e credits in the amount o( EA%%#%%%.%%. -s said amount su +ect to tax2 'xplain. (!8# "88@ &ar 'xams) Suggested Answer: ") 3o. The amount recei)ed y the widow (rom the decedent.s employer may either e a *i(t or a separation ene(it on account o( death. &oth are exclusions (rom *ross income pursuant to pro)ision o( Section $I( ) o( the Tax Code. A!ternati"e Answer: 3o. Since the amount was *i)en to the widow and not to the estate# it ecomes o )ious that the amount is more o( a *i(t. -n one K.S. tax case ('state o( Hellstrom )s. Commissioner# $9 T.C. 8"@)# it was held that payments to the widow o( the president o( a corporation o( the amount the president would ha)e recei)ed in salary i( he li)ed out the year constituted a *i(t and not an income. The controllin* (acts# which would lead to the conclusion that the amount recei)ed y the widow is not an income# are as (ollows: a.) The *i(t was made to the widow rather than the estate: .) There was no o li*ation (or the corporation to ma6e (urther payments to the deceased; c.) The widow had ne)er wor6ed (or the corporation; d.) the corporation recei)ed no economic ene(it; and e.) the deceased had een (ully compensated (or his ser)ices ('state o( Sydney Carter )s. Commissioner# 9A7J# $d @" ($d Cir. "8>"). $) 3o. The commutation o( lea)e o( credits more commonly 6nown as terminal lea)e pay# i.e.# the cash e4ui)alent o( accumulated )acation and sic6 lea)e credits *i)en to an o((icer or employee who retires# or separated (rom the ser)ice throu*h no (ault o( his own# is exempt (rom income tax. (&-< rulin* $7I18" dated 3o)em er I# "88"; Commissioner )s. C, and '(ren Castaneda# =< 3o. 8@%"@# Ccto er "># "88"). ---------------------------------------------------------+-. tax2 ".) Bhat is *ross income (or purposes o( the income

Suggested Answer: ".) Jorei*n corporations e((ectin* a donation is su +ect to donor.s tax only i( the property donated is located in the Ehilippines. ,ccordin*ly# donation o( a (orei*n corporation o( its own shares o( stoc6s in (a)or o( resident employees# is not su +ect to donor.s tax (&-< <ulin* 3o. %"I1I># January $@# "8I>). Howe)er# i( IAF o( the usiness o( the (orei*n corporation is located in the Ehilippines or the shares donated ha)e ac4uired usiness situs in the Ehilippines# the donation may e taxed in the Ehilippines su +ect to the rule o( reciprocity. $.) -( the shares o( tax were *i)en to /r. : in the consideration o( his ser)ices to the corporation# the same shall constitute taxa le compensation income to the recipient ecause it is a compensation (or ser)ices rendered under an employer1employee relationship# hence# su +ect to income tax. The par )alue or stated )alue o( the shares issued also constitutes deducti le expense to the corporation pro)ided it is su +ected to withholdin* tax on wa*es.

---------------------------------------------------------*+. G is employed as a dri)er o( a corporate lawyer and recei)es a monthly salary o( EA# %%%.%% with (ree oard and lod*in* with an e4ui)alent )alue o( E"# A%%.%%. ".) Bhat will e the asis o( G.s income tax2 Bhy2 $.) Bill your answer in 4uestion (a) e the same i( G.s employer is an o stetrician2 Bhy2 (!@# "88@ &ar 'xams) Suggested Answer: ".) The asis o( G.s income tax would depend on whether his employer is an employee or a practicin* corporate lawyer. -( his employer is an employee# the asis o( G.s income tax is E@#A%%.%% e4ui)alent to the total o( the asic salary and the )alue o( the oard and lod*in*. This is so ecause the employerH corporate lawyer has no place o( usiness where the (ree oard and lod*in* may e *i)en. Cn the other hand# i( the corporate lawyer is a practicin* lawyer (sel(1employed)# x should e taxed only on EA# %%%.%% pro)ided that the (ree oard and lod*in* is *i)en in the usiness premises o( the lawyer and (or his con)enience and that the (ree lod*in* was *i)en to G as a condition (or employment. $.) -( the employer is an o stetrician who is sel(1 employed# the asis o( G.s income will only e EA# %%%.%% i( it is pro)en that the (ree oard and lod*in* is *i)en within the

$.) How does Tincome di((er (rom Tcapital2 'xplain. (!"# "88A &ar 'xams)

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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Suggested Answer: ".) =ross -ncome means all income (rom whate)er source deri)ed includin* ( ut not limited to) compensation (or ser)ices# includin* (ees# commissions and similar items: *ross income (rom usiness; *ains deri)ed (rom dealin*s in property; interest; rents; royalties; di)idends; annuities; priDes and winnin*s; pensions: and partner.s distri uti)e share o( the *ross income o( *eneral pro(essional partnership (Sec.$I# 3-<C). A!ternati"e Answer: a.) =ross income means all wealth which (lows into the taxpayer other than as a mere return o( capital. -t includes the (orms o( income speci(ically descri ed as *ains and pro(its includin* *ains deri)ed (rom the sale or other disposition o( capital. .) =ross income means income (in the road sense) less income which is# y statutory pro)ision or otherwise# exempt (rom the tax imposed y law (Sec. 7@# <e). <e*. 3o.$). =ross income (rom usiness means total sales# less cost o( *oods sold# plus any income (rom in)estments and (rom incidental or outside operations or sources. (Sec. 97# <e). <e*. 3o.$) $.) -ncome di((ers (rom capital in that income is any wealth which (lows into the taxpayer other than a return o( capital while capital constitutes the in)estment which is the source o( income. There(ore# capital is (und while income is the (low. Capital is wealth# while income is the ser)ice o( wealth. Capital is the tree while income is the (ruit (0icente /adri*al# et. ,l ). James <a((erty# 7I Ehil. 9"9).

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+ud*ment. How much income did he realiDe when he collected on the +ud*ment2 'xplain. (!$# "88A &ar 'xams) Suggested Answer: ".) /r. ,drian must report the imputed rental )alue o( the house and limousine as income. -( the rental )alue exceeds the personal needs o( /r. ,drian ecause he is expected to pro)ide accommodation in said house (or company *uests or the car is used partly (or usiness purpose# then /r. ,drian is entitled only to a rata le rental )alue o( the house and limousine as exclusion (rom *ross income and only a reasona le amount should e reported as income. This is ecause the (ree housin* and use o( the limousine are *i)en partly (or the con)enience and ene(it o( the employer (Collector )s. Henderson). A!ternati"e Answer: <emuneration (or ser)ices althou*h not *i)en in the (orm o( cash constitutes compensation income. ,ccordin*ly# the )alue (or the use o( the residential house is part o( his compensation income which he must report (or income tax purposes. Howe)er# i( the residential house *i)en to /r. ,drian (or his (ree use as an executi)e is also used (or the ene(it o( the corporationHemployer# such as (or entertainin* customers o( the corporation# only A%F o( the rental )alue or depreciation (i( the house is owned y the corporation) shall (orm part o( compensation income (<,/C "1I>). The (ree use o( a limousine and the mem ership in a country clu is not part o( /r. ,drian.s compensation income ecause they were *i)en (or the ene(it o( the employer and are considered to e necessary incidents (or the proper per(ormance o( his duties as an executi)e o( the corporation. The mem ership (ee in the country clu needs to e reported as income. -t appears that the mem ership o( /r. ,drian to the country clu is primarily (or the ene(it and con)enience o( the employer. This is to ena le /r. ,drian to entertain company *uests (Collector )s. Henderson). $.) 3o# the (ree uni(orms# (ree li)in* 4uarters and the (ree meals inside the camp are not income to Capt. Canuto ecause these are (acilities or pri)ile*es (urnished y the employer (or the employer.s con)enience which are necessary incidents to proper per(ormance o( the military personnel.s duties. 7.) 3one. The E$%%#%%% moral and exemplary dama*es are compensation (or in+uries sustained y /r. -n(ante. The E9%%#%%%.%% reim ursement (or the hospitaliDation expenses and the E@%#%%%.%% (or salaries he (ailed to recei)e are amounts o( any dama*es recei)ed whether y suit or a*reement on account o( such in+uries. Section $I( )(A) o( the Tax Code speci(ically excludes these amounts (rom the *ross income o( the indi)idual in+ured. (Section $I( ).3-<C and Sec. @7 <e). <e*. 3o.$) A!ternati"e Answer: The income realiDed (rom the +ud*ment is only the reco)ery (or lost salaries. This constitutes taxa le income ecause were it not (or the in+ury# he could ha)e recei)ed it (rom his employer as compensation income. ,ll the other amounts recei)ed are either Tcompensation (or the in+uries

---------------------------------------------------------+1. ".) /r. ,drian is an executi)e o( a i* usiness corporation aside (rom his salary# his employer pro)ides him with the (ollowin* ene(its: (ree use o( a residential house in an exclusi)e su di)ision# (ree use o( a limousine and mem ership in a country clu where he can entertain customers o( the corporation. Bhich o( these ene(its# i( any# must /r. ,drian report as income2 'xplain. $.) Capt. Canuto is a mem er o( the armed Jorces o( the Ehilippines. ,side (rom his pay as a captain# the *o)ernment *i)es him (ree uni(orms# (ree li)in* 4uarters in whate)er military camp he is assi*ned# and (ree meal inside the camp. ,re these ene(its income to Capt. Canuto2 'xplain. 7.) /r. -n(ante was hit y a wayward us while on his way to wor6. He sur)i)ed ut had to pay E9%%#%%%.%% (or his hospitaliDation. He was una le to wor6 (or six months which meant that he did not recei)e his usual salary o( E"%#%%%.%% a month or a total o( E@%#%%%.%%. he sued the us company and was a le to o tain a (inal +ud*ment awardin* him E9%%#%%%.%% as reim ursement (or his hospitaliDation. E@%#%%% (or the salaries he (ailed to recei)e while hospitaliDed# E$%%#%%% as moral dama*es (or his pain and su((erin*# and E"%%#%%% as exemplary dama*es. He was a le to collect in (ull (rom the

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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or dama*e recei)ed on account o( such in+uries. which are exclusions (rom *ross income pursuant to Section $I( )(A) o( the Tax Code. ---------------------------------------------------------+ . /r. 5a+o+o is a i* time swindler. -n one year he was a le to earn E" /illion (rom his swindlin* acti)ities. Bhen the Commissioner o( -nternal re)enue disco)ered his income (rom swindlin*# the Commissioner assessed him a de(iciency income tax (or such income. The lawyer o( /r. 5a+o+o protested the assessment on the (ollowin* *rounds: ".) $.) The income tax applies only to le*al income# not to ille*al income: /r. 5a+o+o.s receipts (rom his swindlin* did not constitute income ecause he was under o li*ation to return the amount he had swindled# hence# his receipt (rom swindlin* was similar to a loan# which is not income# ecause (or e)ery peso orrowed he has a correspondin* lia ility to pay one peso: and -( he has to pay the de(iciency income tax assessment# there will e hardly anythin* le(t to return to the )ictims o( the swindlin*.

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+#. -n "88%# /r. 3a)al ou*ht a lot (or E"# %%%#%%%.%% in a su di)ision with the intention o( uildin* his residence on it. -n "889# he a andoned his plan to uild his residence on it ecause the surroundin* area ecame a depressed area and land )alues in the su di)ision went down; instead# he sold it (or EI%%#%%%.%%. ,t the time o( the sale# the Donal )alue was EA%%#%%%.%%. ".) $.) -s the land a capital asset or an ordinary asset2 'xplain. -s there any income tax due on the sale2 'xplain. (!8# "88A &ar 'xams)

Suggested Answer: ".) The land is a capital asset ecause it is neither (or sale in the ordinary course o( usiness nor a property used in the trade or usiness o( the taxpayer. (Sec. 77# 3-<C). $.) :es. /r. 3a)al is lia le to the AF 8now );6 capital *ains tax imposed under Sec. $"(e) o( the Tax Code ased on the *ross sellin* price o( EI%%#%%%.%% which is an amount hi*her than the Donal )alue. ----------------------------------------------------------

7.)

How will you rule on each o( the three *rounds (or the protest2 'xplain. (!I# "88A &ar 'xams) Suggested Answer: ".) The contention that the income tax applies to le*al income and not to ille*al income is not correct. Sec. $I(a) o( the Tax Code includes within the pur)iew o( *ross income all income (rom whate)er source deri)ed. Hence# the ille*ality o( the income will not preclude the imposition o( the income tax thereon. $.) The contention that the receipts (rom his swindlin* did not constitute income ecause o( his o li*ation to return the amount swindled is li6ewise not correct. Bhen a taxpayer ac4uires earnin*s# law(ully or unlaw(ully# without the consensual reco*nition# expressed or implied# o( an o li*ation to repay and without restriction as to their disposition# he has recei)ed taxa le income# e)en thou*h it may still e claimed that he is not entitled to retain the money# and e)en thou*h he may still e ad+ud*ed to restore its e4ui)alent (James )s. K.S.# 7@@ K.S. $"7# "8@"). To treat the em eDDled (unds not as taxa le income would perpetuate in+ustice y relie)in* em eDDlers o( the duty o( payin* income taxes on the money they enrich themsel)es with throu*h em eDDlement# while honest people pay their taxes on e)ery concei)a le type o( income. (James )s. K.S.) 7.) The de(iciency income tax assessment is a direct tax imposed on the owner which is an excise on the pri)ile*e to earn an income. -t will not necessarily e paid out o( the same income that was su +ected to the tax. /r. 5a+o+o.s lia ility to pay the tax is ased on his ha)in* realiDed a taxa le income (rom his swindlin* acti)ities and will not a((ect his o li*ation to ma6e restitution. Eayment o( the tax is a ci)il o li*ation imposed y law while restitution is a ci)il lia ility arisin* (rom a crime. ---------------------------------------------------------+'. /r. NuiroD wor6ed as chie( accountant o( a hospital (or (orty1(i)e years. Bhen he retired at @A he recei)ed retirement pay e4ui)alent to two months. salary (or e)ery year o( ser)ice as pro)ided in the hospital &-< appro)ed retirement plan. The &oard o( Directors o( the hospital (elt that the hospital should *i)e NuiroD more than what was pro)ided (or in the hospital.s retirement plan in )iew o( his loyalty and in)alua le ser)ices (or (orty1(i)e years; hence# it resol)ed to pay him a *ratuity o( E" /illion o)er and a o)e his retirement pay. The Commissioner o( -nternal <e)enue taxed the E" /illion as part o( the *ross compensation income o( NuiroD who protested that it was excluded (rom income ecause (a) it was a retirement pay# and ( ) it was a *i(t. ".) -s /r. NuiroD correct in claimin* that the additional E" /illion was retirement pay and there(ore excluded (rom income2 'xplain. $.) -s /r. NuiroD correct in claimin* that the additional E" /illion was *i(t and there(ore excluded (rom income2 'xplain. (!""# "88A &ar 'xams) Suggested Answer: ".) 3o. The additional E" /illion is not a retirement pay ut a part o( the *ross compensation income o( /r. NuiroD. This is not a retirement ene(it recei)ed in accordance with a reasona le pri)ate ene(it plan maintained y the employer as it was not paid out o( the retirement plan. ,ccordin*ly# the amount recei)ed in excess o( the retirement ene(its that he is entitled to recei)e under the &-<1appro)ed retirement plan would not 4uali(y as an exclusion (rom *ross income.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

&(
$.) 3o. The amount recei)ed was in consideration o( his loyalty and in)alua le ser)ices to the company which is clearly a compensation income recei)ed on account o( employment. Knder the employer.s Tmoti)ation test#. emphasis should e placed on the )alue o( /r. NuiroD ser)ices to the company as the compellin* reason (or *i)in* him the *ratuity# hence it should constitute a taxa le income. The payment would only 4uali(y as a *i(t i( there is nothin* ut *ood will# esteem and 6indness which moti)ated the employer to *i)e the *ratuity. (Stanton )s. K.S.#"I@J. Supp.787). such is not the case in the herein pro lem. A!ternati"e Answer: :es. The E" /illion is not compensation income su +ect to income tax ut a *i(t (rom his employer. There was no e)idence presented to show that he was not (ully compensated (or his (orty1(i)e years o( ser)ice. -( his ser)ices contri uted in a lar*e measure to the success o( the hospital# it did not *i)e rise to a reco)era le de t. The E" /illion is purely a *ratuity (rom the company. -t is a taxa le *i(t to the trans(eror. Knder the Tax Code# *i(ts are excluded (rom *ross income there(ore exempt (rom income tax. (Sec.$I( )(7)# 3-<C; Eiro)ano )s. Commissioner) ---------------------------------------------------------+(. /r. Jrancisco orrowed E"%#%%%.%% (rom his (riend /r. =utierreD paya le in one year without interest. Bhen the loan ecame due /r. Jrancisco told /r. =utierreD that he ( /r. Jrancisco) was una le to pay ecause o( the usiness re)erses. /r. =utierreD too6 pity on /r. Jrancisco and condoned the loan. /r. Jrancisco was sol)ent at the time he orrowed the E"%#%%%.%% and at thetime the loan was condoned. Did /r. Jrancisco deri)e any income (rom the cancellation or condonation o( his inde tedness2 'xplain. (!9# "88A &ar 'xams) Suggested Answer: 3o. /r. Jrancisco did not deri)e any income (rom the cancellation or condonation o( his inde tedness. Since it is o )ious that the creditor merely desired to ene(it the de tor in )iew o( the a sence o( consideration (or the cancellation# the amount o( the de t is considered as a *i(t (rom the creditor to the de tor and need not e included in the latter.s *ross income. ---------------------------------------------------------+). /r. Csorio# a an6 executi)e# while playin* *ol( with /r. EereD# a manu(acturin* (irm executi)e# mentioned to the latter that his (Csorio) an6 had +ust opened a usiness relationship with a i* (orei*n importer o( *oods which EereD. company manu(actures. EereD re4uested Csorio to introduce him to this (orei*n importer and put in a *ood word (or him (EereD)# which Csorio did. ,s a result# EereD was a le to ma6e a pro(ita le usiness deal with the (orei*n importer. -n *ratitude# EereD# in ehal( o( his manu(acturin* (irm# sent Csorio an expensi)e car as a *i(t. Csorio called EereD and told him that there was really no o li*ation on the part o( EereD or his company to *i)e such expensi)e *i(t. &ut EereD insisted

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

that Csorio 6eep the car. The company o( EereD deducted the cost o( the car as a usiness expense. The Commissioner o( -nternal <e)enue included the (air mar6et )alue o( the car as income o( Csorio who protested that the car was a *i(t and there(ore excluded (rom income. Bho is correct# the Commissioner or Csorio2 'xplain. (!"%# "88A &ar 'xams) Suggested Answer: The Commissioner is correct. The car# ha)in* een *i)en to /r. Csorio is consideration o( ha)in* introduced /r. EereD to a (orei*n importer which resulted to a pro(ita le usiness deal# is considered to e a compensation (or ser)ices rendered. The trans(er is not a *i(t ecause it is not made out o( a detach or disinterested *enerosity ut (or a ene(it accruin* to /r. EereD. The (act that the company o( /r. EereD ta6es a usiness deduction (or the payment indicates that it was considered as a pay rather than a *i(t. Hence# the (air mar6et )alue o( the car is includa le in the *ross income pursuant to Sec. $I(a)(") o( the Tax Code (See "8>9 Jederal Tax Hand oo6# p. "9A). , payment thou*h )oluntarily# i( it is in return (or ser)ices rendered# or proceeds (rom the constrainin* (orce o( any moral or le*al duty or a ene(it to the payor is anticipated# is taxa le income to the payee e)en i( characteriDed as a T*i(t. y the payor (Commissioner )s. Du erstein# 7@7 K.S. $>I). A!ternati"e Answer: /r. Csorio is correct. The car was not payment (or ser)ices rendered. There was prior a*reement on ne*otiations etween /r. Csorio and /r. EereD that the (ormer will e compensated (or his ser)ices. /r. EereD# in ehal( o( his company# *a)e the car to /r. Csorio out o( *ratitude. The trans(er ha)in* een made *ratuitously should e treated as a *i(t su +ect to donor.s tax and should e excluded (rom the *ross income o( the recipient# /r. Csorio. The Commissioner should cancel the assessment o( de(iciency income tax to /r. Csorio and instead assess de(iciency donor.s tax on /r. EereD. company. (Sec. $I( )(7)# 3-<C; Eiro)ano )s. Commissioner)

---------------------------------------------------------+*. /r. <odri*o# an I%1year old retired usinessman# (ell in lo)e with a $%1year old Tetchie Sonora# a ni*ht clu hospitality *irl. ,lthou*h she re(used to marry him she a*reed to e his li)e1in partner. -n *ratitude# /r. <odri*o trans(erred to her a condominium unit# where they oth li)e# under a deed o( sale (or E"% /illion. /r. <odri*o paid the capital *ains tax o( AF o( E"% /illion. The Commissioner o( -nternal <e)enue (ound that the property was trans(erred to Tetchie Sonora y /r. <odri*o ecause the companionship she was pro)idin* him. ,ccordin*ly# the Commissioner made a determination that Sonora had compensation income o( E"% million in the year the condominium unit was trans(erred to her and issued a de(iciency income tax assessment. Tetchie Sonora protests the assessment and claims that the trans(er o( the condominium unit was a *i(t and there(ore excluded (rom income.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

&+
How will you rule on the protest o( Tetchie Sonora2 'xplain. (!"$# "88A &ar 'xams) Suggested Answer: - will *rant the protest and cancel the assessment. The trans(er o( the property y /r. <odri*o to /s. Sonora was *ratuitous. The deed o( sale indicatin* a E"% /illion consideration was simulated ecause /r. <odri*o did not recei)e anythin* (rom the sale. The pro lem cate*orically states that the trans(er was made in *ratitude to /s. Sonora.s companionship. The trans(er ein* *ratuitous is su +ect to donor.s tax. /r. <odri*o should e assessed de(iciency donor.s tax and a A%F surchar*e imposed (or (raudulently simulatin* a contract o( sale to e)ade donor.s tax. (Sec.8"( )# 3-<C). ---------------------------------------------------------++. /r. Domin*o owns a )acant parcel o( land. He leases the land to /r. 'nri4ueD (or ten years at a rental o( E"$#%%%.%% per year. The condition is that /r. 'nri4ueD will erect a uildin* on the land which will ecome the property o( /r. Domin*o at the end o( the lease without compensation or reim ursement whatsoe)er (or the )alue o( the uildin*. /r. 'nri4ueD erects the uildin*. Kpon completion the uildin* had a (air mar6et )alue o( E" /illion. ,t the end o( the lease o( the uildin* is worth only E8%%#%%%.%% due to depreciation. Bill /r. Domin*o ha)e income when the lease expires and ecomes the owner o( the uildin* with a (air mar6et )alue o( E8%%#%%%.%%2 how much income must he report on the uildin*2 'xplain. (!7# "88A &ar 'xams) Suggested Answer: Bhen a uildin* is erected y a lessee in the leased premises in pursuance o( an a*reement with the lessor that the uildin* ecomes the property o( the lessor at the end o( the lease# the lessor has the option to report income as (ollows: ".) The lessor may report as income the mar6et )alue o( the uildin* at the time when such uildin* is completed: or $.) The lessor may spread o)er the li(e o( the lease the estimated depreciated )alue o( such uildin* at the termination o( the lease and report as income (or each year o( the lease an ali4uot part thereo( (Sec. 98# << 3o. $). Knder the (irst option# the lessor will ha)e no income when the lease expires and ecomes the owner o( the uildin*. The second option will *i)e rise to an income durin* the year o( lease expiration o( E8%#%%%.%% or "H"% o( the depreciated )alue o( the uildin*. The a)ailment o( the (irst option will re4uire /r. Domin*o to report an income o( E"#%%%#%%%.%% durin* the year when the uildin* was completed. , total o( E8%%#%%%.%% income will e reported under the second option ut will e spread o)er the li(e o( the lease or E8%#%%%.%% per year. A!ternati"e Answer:

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

/r. Domin*o will realiDe an income when the lease expires and ecomes the owner o( the uildin* with a (air mar6et )alue o( E8%%#%%%.%% ecause the condition (or the lease is the trans(er o( the uildin* at the expiration o( the lease. The income to e realiDed y /r. Domin*o at the time o( the expiration will consist o( the )alue o( the uildin* which is E8%%#%%%.%% and any rental income that has accrued as o( said date.

---------------------------------------------------------+,. /r. Jaco o wor6ed (or a manu(acturin* (irm. Due to usiness re)erses the (irm o((ered )oluntary redundancy pro*ram in order to reduce o)erhead expenses. Knder the pro*ram an employee who o((ered to resi*n would e *i)en separation pay e4ui)alent to his three month.s asic salary (or e)ery year o( ser)ice. /r. Jaco o accepted the o((er and recei)ed E9%%#%%% as separation pay under the pro*ram. ,(ter all the employees who accepted the o((er were paid# the (irm (ound its o)erhead still excessi)e. Hence it adopted another redundancy pro*ram. 0arious unpro(ita le departments were closed. ,s a result# /r. Pintanar was separated (rom the ser)ice. He also recei)ed E9%%# %%%.%% as separation pay. ".) $.) Did /r. Jaco o deri)e income when he recei)ed his separation pay2 'xplain. Did /r. Pintanar deri)e income when he recei)ed his separation payH explain. (!@# "88A &ar 'xams)

Suggested Answer: ".) :es. /r. Jaco o deri)ed a taxa le income when he recei)ed his separation pay ecause his separation (rom employment was )oluntary on his part in )iew o( his o((er to resi*n. Bhat is excluded (rom *ross income is any amount recei)ed y an o((icial or employee as a conse4uence o( separation o( such o((icial or employee (rom the ser)ice o( the employer (or any cause eyond the control o( the said o((icial or employee (Sec. $I# 3-<C) A!ternati"e Answer: 3o. /r. Jaco o did not deri)e any taxa le income ecause the separation pay was due to a retrenchment policy adopted y the company so that any employee terminated y )irtue thereo( is considered to ha)e een separated due to causes eyond the employee.s control. The )oluntary redundancy pro*ram re4uirin* employees to ma6e an o((er to resi*n is only considered as a tool to expedite the lay1o(( o( excess manpower whose ser)ices are no lon*er needed y the employer# ut is not the main reason or cause (or the termination. $.) 3o. /r. Pintanar did not deri)e any income when he recei)ed his separation pay ecause his separation (rom employment is due to causes eyond his control. The separation was in)oluntary as it was a conse4uence o( the closure o( )arious unpro(ita le departments pursuant to the redundancy pro*ram. ----------------------------------------------------------

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

&,

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SAINT LOUIS UNIVERSITY BAR OPERATIONS

return (or taxa le year "8I8# its *ains deri)ed (rom the sale o( the two($) condominium units as (ollows: ,-. 16 G sold a piece o( land to the Knited Church o( Christ o( NueDon City# -nc. The land is to e de)oted strictly (or reli*ious purposes y the Church. Bhen the Church tried to re*ister the title o( the land# the <e*ister o( Deeds re(used claimin* that the capital *ains tax was not paid. -s the transaction exempt (rom the capital2 <easons. (!"7# "887 &ar 'xams) Suggested Answer: 3o. under Section $"(e) in relation to Section 98(a)(9) o( the 3ational -nternal <e)enue Code# the seller is the one lia le (or the payment o( the capital *ains tax (rom the sale o( real property y an indi)idual taxpayer. /eanwhile# the Church in this instant case is the uyer. Section $I (9) o( the "8I> Constitution# which exempts church lands# uildin*s# and impro)ements# does not apply ecause the o li*ation to pay the capital *ains tax herein is imposed on G# the seller# and not on the Church. Since payment o( the capital *ains tax is a condition precedent (or the re*istration o( the trans(er certi(icate o( title to real property# the non1payment herein y the seller is a )alid reason (or the <e*istry o( Deeds to deny the trans(er o( the title to the su +ect land. A!ternati"e Answer: 4uestion: a) ,ssumin* that in the hands o( G# the piece o( land is a capital asset# then the sale to the Church is su +ect to capital *ains tax# (or which G is lia le. -t is immaterial that the land will e used exclusi)ely (or reli*ious purposes; i( there is any exemption# then it applies to Church# and not to G# the )endor. ) 3o. The tax exemption *ranted to churches in the Constitution re(ers to property tax and not to capital *ains tax which is an income tax. &esides# the capital *ains tax is the lia ility o( the seller G and not the purchaser. 6 Juan Eanalowon a dama*e suit (or EA%%#%%%.%% a*ainst Juan Talo. Eanalo *ot a writ o( execution and made a le)y on the lot o( Talo. The lot was sold at pu lic auction where Eanalo was the hi*hest idder (or EA%%#%%%.%%. Eanalo re(used to pay any capital *ains tax on his purchase o( said lot. :our opinion. (!"@# "887 &ar 'xams) Suggested Answer: The capital *ains tax (rom sales o( real property is paya le y the seller (Section $" (e) in relation to Section 98 (a) (9) o( the 3-<C). Hence# Eanalo cannot re(use to pay the capital *ains tax on his purchase o( said lot. A!ternati"e Answer: Eanalo is not lia le (or capital *ains tax as only the )endor. -n this case# Talo# is lia le there(ore# i( at all. #6 ,&C# a domestic corporation sold in "8I8 two ($) condominium units o( 5e*aspi Towers in <oxas &l)d. (or EI#"AI#"9$.%%. Taxpayer Corporation declared in its income tax '6 Criental# -nc. holds a proprietary share o( Capital =old Clu . -nc. -t assi*ned without any consideration this share to G# one o( its (orei*n consultants# to ena le him to used its (acilities (or the duration o( his stay in the Ehilippines. G si*ned a Declaration o( Trust where he ac6nowled*ed that the share is owned y Criental# -nc. and where he promised to trans(er the same to whoe)er will succeed him as consultant. Bhen G.s contract with Criental# -nc expired# he le(t the Ehilippines and The capital *ains deri)ed will only (orm a part o( the taxa le income o( the taxpayer suscepti le to deductions. ,ccordin*ly# the net capital *ain on the sale may not necessarily e su +ect to the 7AF tax. The taxpayer.s total income and deductions (or the year must e considered. -t is immaterial whether the corporation is a real esate dealer or not. Since ,&C deri)ed *ains (rom the sale o( condominium units# should it pay the @F capital *ains tax# 7$F corporate income tax or none o( the a o)e ecause the corporation is a real estate dealer2 Discuss. (!7# "88$ &ar 'xams) Suggested Answer: ,&C corporation must pay the 7AF corporate income tax. The 3ational -nternal <e)enue Code does not pro)ide (or the payment o( corporation o( AF capital *ains tax on the sale or real property# whether considered capital assets or not. Such income is included in the computation o( net income (=ross taxa le income less deductions% and is su +ect to the tax rate o( 7AF. A!ternati"e Answer: 5ess: a. ,c4uisition Cost E"#A%"#$8A (Deed o( Sale) . Eayment o( <ealty Tax E98#$9I U E"#A$8#>AA V E7#%7"#%A% Knit , (7"@.A s4. (t) Eroceeds (rom Sale E7#877#@>8 U Knit & (7$$ s4. (t.) E9#$$9#9@7 V EI#"AI#"9$

EAA#9"7 V

E"%9#@@"

Total (a) ( ) E"#AA%#A79 U E"#AIA#"@I V E7#"7A#>"" =ains E$#7I7#"7@ U E$#@78#$8A V EA#%$$#97" Bithout *oin* into computations# answer the (ollowin*

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

&si*ned (or (ree the share to :# his successor in o((ice. Bhat tax# i( any# can e imposed y the &-< on the transaction2 (!"9# "887 &ar 'xams) Suggested Answer: The &-< cannot impose any tax ecause there was no real trans(er o( the ownership o( the su +ect Capitol =ol( Clu # -nc. (Capitol) proprietary share (rom G to :. Creintal# -nc. is the true owner o( the Capitol proprietary share. -t remained the true owner (rom the time o( the Capitol share.s use to :. Criental remained the le*al owner thereo( all throu*hout# while G and : are only the ene(icial owners. A!ternati"e Answers:

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SAINT LOUIS UNIVERSITY BAR OPERATIONS

and ,ssi*nment o( Shares# the a solute ownership o( ,&C Computer Corporation was explicitly reco*niDed. )6 Ce u De)elopment -nc. has an authoriDed capital stoc6 o( EA#%%%#%%%.%% di)ided into A%#%%% shares with a par )alue o( Cne Hundred Eesos (E"%%.%%) per share. C( the authoriDed capital stoc6# twenty1(i)e thousand ($A#%%%) shares ha)e een su scrided. /r. Juan 5e*aspi is a stoc6holder o( CDwhere he has su scription amountin* to "7#%%% shares. To (ully pay his unpaid su scription in the amount o( E8A%#%%%.%% /r. 5e*aspi trans(erred to the corporation a parcel o( land that he owns y )irtue o( a Deed o( ,ssi*nment. Kpon in)esti*ation# the &-< disco)ered that /r. 5e*aspi ac4uired said property (or only EA%%#%%%.%%. ") -s /r. 5e*aspi lia le (or any taxa le *ain2 (!""# "88" &ar 'xams)

a) The )alue o( the use o( the share may e considered compensation income to oth G and : su +ect to income tax. The re)oca le trust may not considered a disposition o( a share o( stoc6 su +ect to capital *ains tax. ) Since the trans(er does not in)ol)e any consideration. G is not su +ect to income tax. Bhile the trans(er is *ratuitous# there is no donati)e intent. Thus# the transaction is not su +ect to donor.s tax. Howe)er# since the certi(icate is e)idence o( interest in the Eroperty o( the corporation# the trans(er o( the said certi(icate is su +ect to the documentary stamp tax o( E%.$% on each E$%% or (ractional part thereo(# o( the (ace )alue o( such certi(icate# in accordance with Section ">I o( the 3-<C (&-< <ulin* $7A1I8). c) -( the &-< puts )alue to the playin* ri*hts# then the trans(er to the expatriate# that the )alue could e treated as compensation to the expatriate# hence# taxa le. (6 ,&C Computer Corp.# purchased some years a*o /em ership Certi(icate 3o. > (rom the Cala ar =ol( Clu # -nc. (or E7%%#%%%.%%. -n 9 Septem er "8IA# it trans(erred the same to /r. John Johnson# its ,merican computer consultant# to ena le him to a)ail o( the (acilities o( the clu durin* his stay here. The consultancy a*reement expired two ($) years later. -n the mean time# the )alue o( the Clu share appreciated and what was purchased y the corporation at E7%%#%%%.%%# commanded a mar6et )alue o( EI%%#%%%.%% in "8I>. &e(ore he returned home a (ew days a(ter his tenure ended# /r. Johnson trans(erred the su +ect share to /r. <o ert James# the new consultant o( the (irm and the newly desi*nated playin* representati)e under a Deed o( Declaration o( Trust and ,ssi*nment o( Shares wherein the (ormer ac6nowled*ed the a solute ownership o( ,&C Computer Corp. o)er the share# that the assi*nment was without any consideration# and that the share was placed in his name ecause the Clu re4uired it to e done. -s the assi*nmentHtrans(er o( the shares (rom Johnson to James su +ect to income tax2 Suggested Answer: The assi*nment o( trans(er o( shares (rom Johnson to James is not su +ect to income tax. There had een no real chan*e o( ownership that too6 place. There ha)in* een actual sale or exchan*e# no income tax incidence can e said to ha)e occurred. -n addition# there was really no income realiDed or recei)ed considerin* that in the Deed o( Declaration o( Trust

Suggested Answer: The trans(er y /r. 5e*aspi to the corporation o( the parcel o( land in payment o( his unpaid su scription did not increase his stoc6holdin* in the corporation. -t cannot e said that he ac4uired control o( the corporation y )irtue o( the trans(er o( the land. His percenta*e o( stoc6holdin*s in the capital stoc6 o( the corporation remains the same a(ter the trans(er as e(ore. There(ore# /r. 5e*aspi deri)ed taxa le *ain (or his economic *ain which was realiDed y )irtue o( the exchan*e o( the land (or the lia ility (or the su scription. A!ternati"e Answer: /r. 5e*aspi is not lia le (or any taxa le *ain. The transaction amounted to an exchan*e o( shares o( property (or shares o( stoc6 as a result o( which the property trans(eror ac4uired control o( the corporation. The "7#%%% shares o( stoc6 ac4uired in exchan*e o( property was more than (i(ty percent (A%F) o( the total su scri ed capital stoc6 o( Ce u De)elopment -nc. (CD-) that 4uali(ied the transactions a tax exempt under the pro)isions o( Sec. 79 W ($) o( the 3ational -nternal <e)enue Code. $) $) -s the CD- lia le (or any taxa le *ain2 (!""# "88" &ar 'xams)

Suggested Answer: CD- itsel( is not lia le (or any taxa le *ain since su scription payments are not considered as taxa le income ein* merely in)estments in the corporation. Howe)er# a taxa le incidence may occur as and when the corporation sells the parcel o( the land (or a price o)er and a o)e the )alue o( the shares o( stoc6 or in this case o)er and a o)e E8A%#%%%.%%. Kntil such time# howe)er# there is no realiDa le income on the part o( the corporation. ---------------------------------------------------------") -n a 4uali(ied tax1(ree exchan*e o( property (or shares under Section 79 (c) ($) o( the Tax Code# what is the tax asis (or computin* the capital *ains on: (a) the sale o( the assets recei)ed y the Corporation: and ( ) the sale o( the shares recei)ed y the stoc6holders in exchan*e o( the assets2 (!9# "889 &ar 'xams)

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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$) -n a 4uali(ied mer*er under Section 79 (c) ($) o( the Tax Code# what is tax asis (or computin* the capital *ains on: (a) the sale o( the assets recei)ed y the sur)i)in* corporation (rom the a sor ed corporation; and ( ) the sale o( the shares o( stoc6 recei)ed y the stoc6holders (rom the sur)i)in* corporation2 (!9# "889 &ar 'xams) Suggested Answer: ") -n a 4uali(ied tax (ree exchan*e o( the property (or the shares under Section 79 (c) ($) Tax Code# the tax asis (or computin* the *ain on the: a) sale o( the assets recei)ed y the corporation shall e the ori*inalHhistorical cost (i.e. purchase price plus expenses o( ac4uisition) o( the propertyHassets *i)en in exchan*e o( the shares o( stoc6. Sales o( the shares o( stoc6 recei)ed y the stoc6holders in exchan*e o( the assets shall e the ori*inalHhistorical cost o( the property *i)en in exchan*e o( the shares o( stoc6.

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

,ll the three (7) were not 4uali(ied to retire under the &-<1appro)ed pension plan o( the corporation. ") -s the separation pay *i)en to <eyes su +ect to income tax2 $) How a out the separation pay recei)ed y CruD2

7) How a out the separation pay recei)ed y &autista2 (!@# "889 &ar 'xams) Suggested Answer: ") The separation pay *i)en to <eyes is su +ect to income tax as compensation income ecause it arises (rom a ser)ice rendered pursuant to an employer1employee relationship. -t is not considered an exclusion (rom *ross income ecause the rule in taxation is tax construed in stri!tissimi =uris or the rule on strict interpretation o( tax exemptions. $) The separation pay recei)ed y CruD is not su +ect to income tax ecause his separation (rom the company was in)oluntary (Sec. $I (>)# Tax Code). 7) The separation pay recei)ed y &autista is li6ewise not su +ect to tax. His separation is due to disa ility# hence in)oluntary. Knder the law# separation pay recei)ed throu*h in)oluntary causes are exempt (rom taxation. ----------------------------------------------------------

A!ternati"e Answer: ") The asis in computin* capital *ains tax in a 4uali(ied tax1(ree exchan*e under Sec. 79 (c) ($) is: (a) Bith respect to the assets recei)ed y the corporation the same as it would e in the hands o( the trans(eror increased y the amount o( the *ain reco*niDed to the trans(eror on the trans(er. ( ) Bith respect to the shares recei)ed y the stoc6holders in exchan*e o( the assets ? the same as the asis o( the property# stoc6 or security exchan*ed# decreased y the money recei)ed and the (air mar6et )alue o( the other property recei)ed and increased y the amount treated as di)idend o( the share holder and the amount o( any *ain that was reco*niDed on the exchan*e. $) -n a 4uali(ied mer*er under Section 79 (c) ($) o( the Tax Code# the tax asis (or computin* the capital *ains on: (a) the sale o( the assets recei)ed y the sur)i)in* corporation (rom the a sor ed corporation shall e the ori*inalHhistorical cost o( the assets when still in the hands o( the a sor ed corporation. ( ) the sale o( the shares o( the stoc6 recei)ed y the stoc6holders (rom the sur)i)in* corporation shall e the ac4uisitionHhistorical cost o( assets trans(erred to the sur)i)in* corporation. ----------------------------------------------------------

, . &orn o( a poor (amily on "9 Je ruary "899# /ario wor6ed his way throu*h colle*e. ,(ter wor6in* (or more than $ years in G /anu(acturin* Corporation# /ario decided to retire and a)ail o( the ene(its under the )ery reasona le retirement plan maintained y his employer. He planned to in)est whate)er retirement ene(its he would recei)e in a usiness that will pro)ide his employer with the needed raw materials. Cn the day o( his retirement on 7% ,pril "8IA# he recei)ed E9%%#%%%.%% as retirement ene(it. -n addition# his endowment insurance policy# (or which he was payin* an annual premium o( E"#A$%.%% since "8@A# also matured. He was then paid the (ace )alue o( his insurance policy in the amount o( EA%#%%%.%%. -s his EA%#%%%.%% insurance proceeds exempt (rom income taxation2 (!9# "88" &ar 'xams) Suggested Answer: The EA%#%%%.%% insurance proceeds is not totally exempt (rom income tax. The excluded amount is only that portion which corresponds to the premiums that he had paid since "8@A. at the rate o( E"#A$%.%% per year multiplied y twenty ($%) years which was the period o( the policy# he will e su +ect to report as taxa le income the amount o( E"8#@%%.%% (Sec. $I# 3-<C) ----------------------------------------------------------

,1. Eedro <eyes# an o((icial o( Corporation G# as6ed (or an earlier retirement ecause he was emi*ratin* to ,ustralia. He was paid E$#%%%#%%%.%% as separation pay in reco*nition o( his )alua le ser)ices to the corporation. Juan CruD# another o((icial o( the same company# was separated (or occupyin* a redundant position. He was *i)en E"#%%%#%%%.%% as separation pay. Jose &autista was separated due to his (ailin* eyesi*ht. He was *i)en EA%%#%%%.%% as separation pay.

,#. Delstar 'mmanuel EereD# a *o)ernment employee# retires (rom the ser)ice upon reachin* the compulsory

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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retirement a*e o( @A. would the amount o( his entitled to recei)e y way o( commutation o( his accumulated lea)e credits o( his terminal lea)e pay# e su +ect to income tax2 (!A# "88" &ar 'xams) Suggested Answer:

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

$) The &-< claims also that the sale o( parcel & should e taxed as a sale y a corporation. -s &-< correct2 (!"%# "889 &ar 'xams) Suggested Answer:

The amount that 'mmanuel EereD is to recei)e should not e su +ected to income tax# and such was the rulin* y the Supreme Court in the -3 <e Oialcita ,dministrati)e Case ( ,dm. /atter 3o. 8%1@%"A1SC# "I Ccto er "88%). The rulin* apparently repudiated# or at least is inconsistent with# its earlier decision in Commissioner )s. 0ictoriano (=.<. 3o. I7">@# "% ,u*ust "8I8). ----------------------------------------------------------

") The &-< is not correct# since there is no showin* that the ac4uisition o( th property y 3oel and Jo)y 5an*it as pro in iviso owners and prior to the (ormation o( the partnership was used# intended (or used# or ears any relation whatsoe)er to the pursuit or conduct o( the partnership usiness. The sale o( parcel , shall there(ore not e treated as a sale y an unre*istered partnership# ut an ordinary sale o( the capital assets# and hence will e su +ect to the AF capital *ains tax and documentary stamp tax on trans(er o( real property# said taxes to e orne e4ually y the co1owners. A!ternati"e Answer: The &-< is correct in treatin* the *ain (rom the sale o( parcel , y 3oel and Jo)y 5an*it at a pro(it o( E"#%%%#%%%.%% in the case o( Pas!ual an >ragon v. Commissioner # =.<. 3o. >I"77. Ccto er "I# "8II# the Supreme Court ruled that the sharin* o( returns does not in itsel( esta lish a partnership whether or not the persons sharin* therein ha)e a +oint or common ri*ht or interest in the property. The decision in said case cannot e applied here ecause clearly the parties or*aniDed a partnership duly re*istered with the Securities and 'xchan*e Commission. They pooled their resources to*ether with the purpose o( di)idin* the pro(it etween them. $) The &-< is correct# since a corporation s de(ined under Section $% (a) o( the Tax Code includes partnerships# no matter how created or or*aniDed except *eneral pro(essional partnerships. The usiness partnership in the instant case# shall there(ore e taxed in the same manner as a corporation on the sale o( parcel &. T he sale shall thus e su +ect to the credi le withholdin* tax under <e)enue <e*ulations "18%# as amended y "$189# on the sale o( parcel &# and the partnership shall report the *ain realiDed (rom the sale when it (iles its income tax return. @6 <o erto <uiD and Condrado dela CruD ou*ht three (7) parcels o( land (rom <odri*o Sa ado on /ay 9# "8>@. Then on I July "8>># they ou*ht two parcels o( land (rom /i*uel SancheD. -n "8II# they sold the (irst three parcels o( land to Central <ealty -nc. -n "8I8# they sold the two parcels to Jose =uerrero. <uiD and CruD realiDed a net pro(it o( E"%%#%%%.%% (or the sale in "8II and E"A%#%%%.%% (or the sale in "8I8. The correspondin* capital *ains taxes were indi)idually paid y <uiD and CruD. Cn $% Septem er "88%# howe)er# <uiD and CruD recei)ed a letter (rom the Commissioner o( -nternal <e)enue assessin* them de(iciency corporate income taxes (or the years "8II and "8I8 ecause# accordin* to the Commissioner# durin* said years they# as co1owners in the real estate transactions# (ormed unre*istered partnership or +oint )enture taxa le as a corporation and that the unre*istered partnership was su +ect to corporate income tax# as distin*uished (rom pro(its deri)ed (rom the partnership y them which is su +ect to indi)idual income tax.

,'. -n Decem er "887# the San**unian* &ayan authoriDed a Christmas onus o( E7#%%%.%%# a cash *i(t o( EA#%%%.%%# and transportation and representation allowance o( E@#%%%.%% (or each o( the municipal employees. ") $) 7) -s the Christmas onus su +ect to any tax2 How a out the cash *i(t2 How a out the transportation and representation allowances2 (!># "889 &ar 'xams)

Suggested Answer: ") The Christmas onus *i)en y the San**unian* &ayan to the municipal employees is taxa le as additional compensation (Sec. $" (a) # Tax Code). 8@ut See 1,,* NIRC .ro"iding tax exe2.tion /or 4onuses& %as1 gi/ts& et%.& in%!uding 1#t1 2ont1 .a5 not in ex%ess o/ P#-&---.6 $) The cash *i(t per employee o( EA#%%%.%% ein* su stantial may e considered taxa le also. They parta6e the nature o( additional compensation income as it is hi*hly dou t(ul i( municipal *o)ernments are authoriDed to ma6e *i(ts in su stantial sums such as this. They are not (urthermore *i(ts o( small )alue which employers mi*ht *i)e to their employees on special occasions li6e Christmas ? items which could e exempt under &-< <e)enue ,udit /emo 3o. "1I>. 7) The transportation and representation allowances are actually reim ursements (or expenses incurred y the employee (or the employer. Said allowances spent y the employee (or the employer are desi*ned to enhance the 4uality o( the ser)ice that the employer is supposed to per(orm (or its clientele li6e people o( the municipality. ----------------------------------------------------------

,( A6 3oel 5an*it and his rother# Jo)y# ou*ht a parcel o( land which they re*istered in their names as pro in iviso owners (Earcel ,). Su se4uently# they (ormed a partnership duly re*istered with Securities and 'xchan*e Commission# which ou*ht another parcel o( land (Earcel &). &oth parcels o( land were sold# realiDin* a net pro(it o( E"#%%%#%%%.%% (or parcel , and EA%%#%%%.%% (or parcel &. ") The &-< claims that the sale o( parcel , should e taxed as a sale y an unre*istered partnership. -s the &-< correct2

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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,re <o ert <uiD and Conrado CruD# lia le (or de(iciency corporate income tax2 (!># "88" &ar 'xams) Suggested Answer:

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

,re the re)enues o( Caledonia ,ircar*o (rom tic6ets reser)ed y its Ehilippine o((ice su +ect to tax2 (!"A# "889 &ar 'xams) Suggested Answer:

<o ert <uiD and Conrado CruD are not lia le (or corporate income tax. , andonin* e)idently the =atchalian rule# the Supreme Court in a recent rulin* (Eascuals )s. Court o( Tax ,ppeals# =. <. 3o. >I7"77# "I Cct. "8II)# held that isolated transactions y two or more persons do not warrant their ein* considered as unre*istered partnership . They will instead e considered as mere co1owners; no corporate income tax is due on mere co1ownerships. -t was# there(ore correct (or <uiD and CruD to merely pay their indi)idual income tax lia ilities on the real estate transactions. ---------------------------------------------------------,). G1land Condominium Corporation was or*aniDed y the owners o( units in G1land &uildin* in accordance with the /aster Deed with Declaration o( <estrictions. The G1land &uildin* Corporation# the de)eloper o( the uildin*# con)eyed the common areas in (a)or o( the G1land Condominium Corporation. -s the con)eyance su +ect to any tax2 (!"$# "889 &ar 'xams) Suggested Answer: The con)eyance is not su +ect to any tax. The same as without consideration and not in connection with a sale made to G1land Condominium Corporation# and the purpose o( the con)eyance to the latter is (or the mana*ement o( the common areas (or the common ene(it o( the unit owners. The same is not su +ect to income tax since no income was realiDed as a result o( the con)eyance# which was made pursuant to the Condominium ,ct (<.,. 3o. 9@$@# and the purpose o( which was merely to )est title to the common areas in (a)or o( the land Condominium Corporation. There ein* no monetary consideration# neither is the con)eyance su +ect to the credita le withholdin* tax imposed under <e)enue <e*ulations "18%# as de(ined.

The re)enues in the Ehilippines o( Caledonia ,ircar*o as an o((1line airline (rom tic6et reser)ation ser)ices are taxa le income (rom whate)er source under Sec. $I(a) o( the Tax Code. This case is analo*ous to Commissioner ). &C,C. =.<. 3o. @A>>71>9# ,pril 7%# "8I> where the Supreme Court ruled that the income recei)ed in the Ehilippines (rom the sale o( tic6ets y an o((1line airline is taxa le as income (rom whate)er source. (@ut see de/inition o/ 0Gross P1i!i..ine @i!!ings3 under t1e 1,,* NIRC6 ----------------------------------------------------------

,+. ')elyn is a *raduate student o( K.E. -n January # "88"# she won the Ealanca ,ward (or an outstandin* short story she wrote. The award was E$A#%%%.%% in cash. -n Je ruary# "88"# she was also named most 0alua le Elayer o( the 0arsity )olley all team and she was *i)en a trophy plus E"%#%%%.%% . Jinally# -n /arch #"88"# she recei)ed a Jellowship ,ward (rom the Kni)ersity o( Cali(ornia to pursue a master.s de*ree in ,merican literature. The (ellowship is (or L"%#%%%.%% plus (ree oard and lod*in* (or two ($) semesters. Should ')elyn include these awards and (ellowship in her *ross income2 <easons. (!$%# "887 &ar 'xams) Suggested Answer: =ross income includes priDes and winnin*s (Section $> o( the 3ational -nternal <e)enue Code R3-<CS# except those stated in Section $I &.(I)#(') o( the 3-<C# to wit: (e) EriDes and awards made primarily in reco*nition o( reli*ious# charita le# scienti(ic# educational# artistic# literary# or ci)ic achie)ement ut only i(: (i) The recipient was selected without any action on his part to enter the contest or proceedin*: an The recipients is not re4uired to rendered su stantial (uture ser)ices as a condition to recei)in* the priDe or award.

(ii) The second con)eyance was actually no con)eyance at all ecause when the units were sold to the )arious uyers# the common areas were already part and parcel o( the sale o( said units pursuant to the Condominium ,ct. Howe)er# the Deed o( Con)eyance is su +ect to documentary stamp tax. 3.&. Documentary stamps tax and Condominium 5aw are excluded (rom the co)era*e o( the &ar 'xaminations. ---------------------------------------------------------,*. Caledonia ,ircar*o is an o((1line international carrier without any (li*ht operations in the Ehilippines. -t has# howe)er# a liaison o((ice in the Ehilippines which is duly licensed with the Securities and 'xchan*e Commission# esta lished (or the purpose o( pro)idin* passen*er and (li*ht in(ormation# reser)ation and tic6etin* ser)ices.

The (irst award *ranted to ')elyn was a Ealanca award. This 6ind o( award er4uires su mission o( literary wor6s. Hence# this is included in the *ross income ecause it (ails to meet the le*al re4uisites pro)ided (or in the a(ore4outed pro)isions o( law speci(ically item (i). The second award *ranted to ')elyn was the /ost 0alua le Elayer ,ward. -n this 6ind o( award# ')elyn did not (ile any application to enter into any contest. The award was *i)en to her in reco*nition (or her outstandin* per(ormance in the (ield o( sports. Howe)er# the reco*nition in the (ield o( sports is not amon* those stated in the a(ore4uoted pro)ision o( law. Thus# the award *ranted to her does (all under the a(ore4uoted pro)ision o( law.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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The last award *ranted to her the Jellowship ,ward. This re4uires also su mission o( application to 4uali(y (or such award. Hence# it (ails to meet the necessary re4uisites o( the a(ore4uoted pro)ision o( law speci(ically item (i). A!ternati"e Answers: a) The award o( E$A#%%%.%% should e included in ')elyn.s *ross income (or while it was earned as a priDe (or literary achie)ement. -t cannot e said that she won without any action on her part to enter the contest. Her E"%#%%%.%% priDe as /ost 0alua le Elayer cannot e excluded (or the same reason. &oth awards# howe)er# may e considered income su +ect to income tax. The (ellowship award o( L"%#%%%.%% is# howe)er# excluded (rom her income as she was selected there(or without any action on her part and the same was *i)en to her in reco*nition o( literary and educational achie)ement# presuma ly without her ein* re4uired to render (uture ser)ices (or the *rantor. ) -t depends. Section $I ( )(I#') o( the 3-<C enumerates the re4uirements in order to exclude the item (rom taxation. The Tax Code re4uires that the priDes and awards are *i)en primarily in reco*nition o( reli*ious# charita le# scienti(ic# educational# artistic# literary or ci)ic achie)ements. The awards mentioned were *i)en to the taxpayer in reco*nition on her literary achie)ement in the case o( the Ealanca ,ward# the most )alua le player award (or ci)icHeducational achie)ement and the (ellowship award (or educational achie)ement. Section $I( ) (urther re4uires that the recipients must e selected without any action on his part to enter the contest or proceedin* and the taxpayer1recipient is not re4uired to render su stantial (uture ser)ices as a condition to recei)in* the priDe or award. -( these two re4uirements are met# then the items should not e included in the *ross income. ----------------------------------------------------------

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

$) 0anishin* deductions or property pre)iously taxed in estate taxation re(ers to the diminishin* deducti ilityHexemption# at the rate o( $%F o)er a period o( (i)e (A) years until it is lost a(ter the (i(th year o( any property (situated in the Ehilippines) (ormin* part o( the *ross estate ac4uired y the decedent (rom a prior decedent who died within a period o( (i)e (A) years (rom the decedent.s death. ----------------------------------------------------------

1--. /ari el Santos# a retired pu lic school teacher# relies on her pension (rom the =S-S and the interest income (rom a time deposit o( EA%%#%%%.%% with the ,&C &an6. -s /ari el Santos lia le to pay any tax on her income2 (!"7# "889 &ar 'xams) Suggested Answer: /ari el Santos is exempt (rom tax on the pension (rom the =S-S (Sec. $I ( )(>)(J)# Tax Code). Howe)er# as re*ards her time deposit# the interest she recei)es thereon is su +ect to $%F (inal withholdin* tax. (Sec. $"(a)(c)# Tax Code). ----------------------------------------------------------

1-1. 16 &ates ,d)ertisin* Company is a non1resident corporation duly or*aniDed and existin* under the laws o( Sin*apore. -t is not doin* usiness and has no o((ice in the Ehilippines. Eilipinas =arment -ncorporated# a domestic corporation retained the ser)ices o( &ates to do all the ad)ertisin* o( its products a road. Jor said ser)ices# &ates (ees are paid throu*h outward remittances. ,re (ees recei)ed y &ates su +ect to any withholdin* tax2 (!"I# "889 &ar 'xams)

,,. ") $)

Bhat are: Dis*uised di)idends in income taxation2 =i)e an example. 0anishin* deductions in estate taxation2 (! "# "889 &ar 'xams)

Suggested Answer: The (ees paid to &ates ,d)ertisin* Co.# a non1resident (orei*n corporation are not su +ect to withholdin* tax since they are not su +ect to Ehilippine tax. They are exempt ecause they do not constitute income (rom Ehilippine sources# the same ein* compensation (or la or or personal ser)ices per(ormed outside the Ehiippines (Sec. 7@(c)(7) and Sec. $A( )(")# Tax Code). 6 G owns a hal(1hectare property in &acoor# Ca)ite which in "8I% was expropriated y the national *o)ernment# throu*h the Department o( Eu lic Bor6s and Hi*hways. ,(ter ten years# G was paid E$#%%%#%%%.%% as +ust compensation plus @F annual interest y the DEBH ut minus the withholdin* tax. -s the action o( DEBH proper2 <easons. (!A# "887 &ar 'xams) Suggested Answer: 3o# the action o( DEBH is not proper. -n the case o( Ero)ince o( Taya as )s. EereD Ehil. 9@> +ust compensation was de(ined as :the +ust and complete

Suggested Answer: ") Dis*uised di)idends are those income payments made y a domestic corporation. Bhich is su sidiary o( a non1 resident (orei*n corporation# to the latter ostensi ly (or ser)iced rendered y the latter to the (ormer# ut which payments are disproportionately lar*er than the actual )alue o( the ser)ices rendered. -n such case# the amount o)er and a o)e the true )alue o( the ser)ice rendered shall e treated as a di)idend# and shall e su +ected to the correspondin* tax o( 7AF on the Ehilippine source *ross income# or such other pre(erential rate as may e pro)ided under a correspondin* Tax Treaty. 'xample: <oyalty payment under a correspondin* licensin* a*reement.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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e4ui)alent o( the loss which the owner o( a thin* expropriated has to su((er y reason o( the expropriation. Jurther# in &-< <ulin* @"18" +ust compensation was de(ined as that which is paid y the =o)ernment e4ui)alent to the )alue o( the property at the time o( its ta6in*. -t is the (air and (ull e4ui)alent (or the indemnity. &ased in the (ore*oin* it is clear there(ore that the amount recei)ed a(ter "% years as +ust compensation is not in any way a pro(it# *ain or income on the part o( G. in the same )ein# the @F annual interest paid y DEBH is not income. The same parta6es o( the nature o( a penalty or indemnity due and accruin* to G (or ha)in* een depri)ed o( the use and ene(it y not ein* paid o( the (air mar6et )alue o( the property since its ta6in* "% years a*o. Hence# the DEBH should not ha)e withheld taxes. A!ternati"e Answer: a) 3o. the withholdin* tax (presuma ly on capital *ains) should ha)e een ased on the (air mar6et )alue o( the property at the time o( the expropriation. Thus# in this case# (or purposes o( computin* the withholdin* tax on capital *ains# the amount representin* the @F annual interest should ha)e een excluded (rom the withholdin* tax ase. ) 3o. Bith respect to capital *ains on sales o( realty to the *o)ernment# G may elect to include the same in his *ross compensation income or to pay the correspondin* capital *ains tax. &y withholdin* the taxes on the +ust compensation ((or which the asis should only e E$#%%%#%%%.%%# excludin* the interest) DEBH denied such option to G. ,ssumin* the property is an ordinary asset# the expropriation proceedin*s in "8I% is not su +ect to the credita le withholdin* tax <e)enue <e*ulations 3os. "$1I8 and "18% implementin* Section A% ( ) o( the 3-<C# the trans(er o( the property was e((ected in "8I%. the a o)e mentioned re)enue rules and re*ulations are applica le only to sales# exchan*e or trans(ers o( real properties consummated on or a(ter " January "88% (&-< <ulin* %9%18"). The @F interest on the +ust compensation is not in the nature o( an interest on Ehilippine currency an6 deposit and yield or any other monetary ene(it (rom deposit su stitutes (rom trust (und and similar arran*ements# the same is not su +ect to the $%F (inal withholdin* tax under Sec. $" o( the 3-<C (&-< <ulin* %9%18"). #6 Eaci(ic# -nc is en*a*ed in o)erseas shippin*. -t time chartered one o( its ships to a Japanese company on a (i)e1year term. The charter was consummated throu*h the e((orts o( Pamino /oto# a To6yo ased ro6er. The ne*otiation too6 place in To6yo. The a*reement calls (or Eaci(ic# -nc. to pay Pamino /oto LA%#%%%.%%. :our opinion is sou*ht whether Eaci(ic# -nc should withhold the tax e(ore sendin* the compensation o( Pamino /oto. (!"A# "887 &ar 'xams) Suggested Answer: The compensation o( Pamino /oto is not su +ect to withholdin* tax. Compensation (or la or or personal ser)ices per(ormed outside the Ehilippines are considered as income (rom sources without the Ehilippines (sec. 7@(c)(7) and (a)(7). Pamino /oto.s e((orts in consumin* the Charter is a (orm o( la or or ser)ices.

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

Considerin* (urther than Pamino /oto is a To6yo ased ro6er# presuma ly a non1resident (orei*n corporation# it is taxa le only on income within the Ehilippines. Since# the contract was consummated in Japan# Pamino /oto.s compensation# there(ore# is not su +ect to withholdin* tax. A!ternati"e Answers: a) Taxes should not e withheld at the income was deri)ed (rom an acti)ity outside the country and# there(ore# (rom sources outside the Ehilippines. -t has een held in Commissioner ). Japan ,ir 5ines# $%$ SC<, 9A% that (or the source o( income to e considered as comin* (rom the Ehilippines# it is su((icient that the income is deri)ed (rom acti)ities within the country. The time charterin* o( the ship occurred outside the Ehilippine territory. There(ore# income deri)ed there(rom is not su +ect to income taxes that may e withheld at source. ) Pamino /oto is non1resident alien not en*a*ed in trade or usiness in the Ehilippines. ,ccordin* to Section $A o( the 3-<C# he is lia le to pay income tax i( the compensation paid y Eaci(ic is compensation income deri)ed (rom the sources within the Ehilippines. Howe)er# the ro6era*e ser)ice o( Pamino /oto was rendered in To6yo. ,pplyin* the source1 rule in Section 7@ o( the 3-<C# the income deri)ed y the taxpayer is income deri)ed (rom sources outside the Ehilippines. Thus# the compensation o( Pamino /oto is not su +ect to Ehilippine income tax. Eaci(ic -nc. should not withhold income tax on the payment. ---------------------------------------------------------1- . G is the ,d)ertisin* /ana*er o( /an* Dou*las Ham ur*er# -nc. G had dinner with :# owner o( a chain o( restaurants# to con)ince the latter to carry /an* Dou*las. Ham ur*er. ,(ter : a*reed# oth G and : went their separate ways. G cele rated y *oin* to sin*le.s ar. He pic6ed up a partner and consumed a ottle o( eer. He dro)e home at 7:%% a.m.. on his way# he sideswiped a pedestrian who died as a result o( the accident. G settled the case extra+udicially y payin* the heirs o( the pedestrian EA%#%%%.%%. the money# howe)er# came J<C/ /an* Dou*las Ham ur*er# -nc. Discuss whether the EA%#%%%.%% can e claimed y /an* Dou*las Ham ur*er# -nc. as an ordinary and necessary expenses. (!"# "887 &ar 'xams) Suggested Answer: 3o. as the expenditure had not een incurred in carryin* on his trade or usiness# the same cannot e considered an ordinary and necessary expense (or which deduction may can claimed. Such expense is a personal expense which is not deducti le (rom the *ross income. A!ternati"e Answer: a) -n the case o( Hel)erin* )s. HumptonR"87A; CC, 8th >8JR$dS7AIS# it was held that: <estitution is ordinary expected to e made y a person in the course o( whose usiness a wron* is committed# so that he may deduct the amount thereo( as an ordinary and necessary. usiness expenses.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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-n the case at ar# the money ad)anced y /an* Dou*las Ham ur*er -nc. to pay o(( the ci)ic lia ility o( G# which arose (rom the accident a(ter a usiness deal has een struc6 (or /an* Dou*las Ham ur*er -nc. was in (act reparationHrestitution to the a**rie)ed heirs. Howe)er# the same cannot e considered as an ordinary and deducti le expense# since the law poses as a condition (or its deducti ility that the wron* or tort should ha)e een committed in the course o( the usiness. ) -( /an* Dou*las Ham ur*er# -nc. treats the ad)ances as salary or compensation o( : who is an employee o( /an* Dou*las and withholds the correspondin* tax thereon then there is a possi ility o( deductin*. ----------------------------------------------------------

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

the ene(it o( G as to e disallowed as a deduction (rom taxa le income. ,ssumin* G is recei)in* purely compensation income# he can only deduct (rom *ross compensation income personal exemption# additional personal exemption and special additional exemption(Section $8# 3-<C as amended). 6 G.s (a)orite charity or*aniDation is the Ehilippine 3ational <ed Cross. To raise money# E3<C sponsored concert (eaturin* the ,ustira &oys Choir. G ad)anced E"%%#%%%.%% to the E3<C (or which he was issued a promissory note. &e(ore its maturity# G cancelled and return the note to E3<C. ,n ad)ertisin* man# G also undertoo6 the promotions o( the ,utria &oys Choir. Eart o( the promotions campai*n was to as6 prominent personalities to pu licly donate lood to the E3<C a day e(ore the concert. G himsel( donated "%% cc o( lood. G intends to claim as deductions the )alue o( the note# the cash )alue o( the promotions campai*n and the cash )alue o( the lood he donated. =i)e your le*al ad)ice. (!"%# "887 &ar 'xams) Suggested Answer: The )alue o( the note can e claimed as deduction as charita le contri ution. Bhile the amount was ori*inally a loan# it can e considered to ha)e ecome a *i(t or contri ution when G cancelled and returned the note to E3<C# a charita le or*aniDation. Cn the other hand# the cash )alue o( the promotions campai*n cannot e claimed as deduction. ,d)ertisin* expenses can only e deducted (rom the re)enues where the expenses was incurred. -n the case at hand# E3<C is the re)enue1producin* entity not G. G did not deri)e any re)enue. Thus# the cash )alue o( his promotions campai*n cannot e claimed as deduction. A!ternati"e Answers: a) The )alue o( the note 4uali(ies s a contri ution to a charita le institution which may e deducted (rom *ross income ut only to the extent that it does not exceed @F 8Now 1-;6 o( his taxa le income deri)ed (rom usiness. G cannot claim deductions (or the other items. Charita le and other contri utions# to e deducti le# must actually ha)e een paid# which is not true o( the )alue o( the ad)ertisin* promotions and must represent some economic ene(it to the recipient# which is not true o( the lood donation. ) Section $8 as amended y <, >98@ allows the deduction o( the donation to an accredited relie( or*aniDation (or the reha ilitation o( the calamity stric6en areas declared y the Eresident. Clearly# the E3<C will 4uali(y as donee relie( or*aniDation. The E"%%#%%%.%% ? note may e allowed to the extent o( its cash )alue considerin* that the ma6er o( the note is the donee itsel(. The rule is# donation made in 6ind shall e determined at its (air mar6et )alue as o( the date such donations or *i(ts are made. (Section "% &-<13'D, <e*ulation "1I") The ser)ices rendered y the taxpayer to promote the show and the "%% cc lood may not e allowed ecause o( the di((iculty in *ettin* the (air1mar6et )alue o( these non1cash donations. ----------------------------------------------------------

1-#. 16 The Jilipinas Hospital (or Crippled Children is a charita le or*aniDation. G )isited the hospital# on his irthday# as was his custom. He *a)e E"%%#%%%.%% to the hospital and EA#%%%.%% to a crippled *irl whom he particularly pitied. , crippled son o( G is in the hospital as o( its patients. G wants to exclude oth the E"%%#%%%.%% and the EA#%%%.%% (rom his *ross income. Discuss. (!$# "887 &ar 'xams) Suggested Answer: Knder Sec. $8(h) (") o( the 3ational -nternal <e)enue Code charita le contri utions to e deducti le must e: a. actually paid or made to domestic corporations or associations or*aniDed and operated exclusi)ely (or reli*ious# charita le# scienti(ic# youth and sports de)elopment# cultural or educational purposes or o( reha ilitation o( )eterans or to social wel(are institutions no part o( which inures to the ene(it o( any pri)ate indi)idual; . made within the taxa le year; c. not more than @F ((or indi)iduals) o( 7F ((or corporations) o( the taxpayer.s taxa le income to e computed without includin* the contri ution. 8N9? 1-; /or indi"idua!s and (; /or %or.orations6 ,pplyin* the a o)e1pro)isions o( law to the case at ar# it is clear there(ore that only the E"%%#%%%.%% contri ution o( G to Jilipinas Hospital (or Crippled Children 4uali(ied as a deducti le contri ution. Sec. $8(h)(") o( the 3-<C expressly pro)ides that the same must e actually paid to a charita le or*aniDation to e deducti le. 3ote that the law accorded no pri)ile*e to similar contri utions extended to pri)ate indi)iduals. Hence# the EA#%%%.%% contri ution to the crippled *irl cannot e claimed as a deduction. A!ternati"e Answer: The E"%%#%%%.%% donation may properly e deducted (rom G.s *ross income# ut not the EA#%%%.%% donated to the crippled *irl# as charita le and other contri utions that may e deducted (rom taxa le income do not contemplate those *i)en to indi)iduals. Bhile it may e that G.s son is a patient in the hospital# it cannot e said that part o( its net income inures to

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

1-'. G +ust hurdled the ar examinations and immediately en*a*ed in the practice o( law. -n preparin* his income tax return# he listed the (ollowin* as deducti le items: (a) (ees paid to the Supreme Court to e a le to ta6e the ar examinations; ( ) (ees paid to a law school to enroll in its pre1 ar re)iew classes; (c) malpractice insurance and (d) amount spent to entertain a +ud*e who decide his (irst case. Bhich deductions are allowa le: <easons. (! 7# "887 &ar 'xams) Suggested Answer: Sec. $8 o( the 3ational -nternal <e)enue Code on deductions# amon* other thin*s pro)ides: (a) 'xpenses (") &usiness 'xpenses (a) -n *eneral1 ,ll the ordinary and necessary expenses paid or incurred durin* the taxa le year in carryin* on any trade or usiness# includin* a reasona le allowance (or salaries or other compensation (or personal ser)ices actually rendered; tra)elin* expenses while away (rom home in the pursuit o( trade# pro(ession or usiness; rentals or other payments re4uired to e made as a condition to the continued use or possession# (or the purpose o( the trade# pro(ession or usiness o( property to which the taxpayer has not ta6in* title or in which he has no e4uity. Jurther# Sec. @8 o( <e)enue <e*ulations 3o. $# as amended# otherwise 6nown as -ncome Tax <e*ulations reads: Sec. @8. Ero(essional 'xpenses1, pro(essional may claim as deductions the cost o( supplies used y him or in the practice o( his pro(ession# expenses paid in the operation and repair o( transportation e4uipment used in ma6in* pro(essional calls# dues to pro(essional societies and su scriptions to pro(essional +ournals# the rent paid (or o((ice rooms# the expenses o( the (uel# li*ht# water# telephone# etc. used on such o((ices# and the hire o( o((ice assistants. ,mounts currently expended (or oo6s# (urnitures and pro(essional instruments and e4uipment# the use o( li(e o( which is short# may e deducted. &ut amounts expended (or oo6s# (urniture and pro(essional instruments and e4uipment o( the permanent character are not allowa le deductions. Jrom the (ore*oin* pro)isions o( law that ordinary and necessary expenses incurred durin* a taxa le year pertainin* directly to the practice o( a pro(ession may e allowed as deductions# it may e in(erred (rom a 6een readin* o( Sec. @8 o( <e)enue <e*ulations 3o. $ that aside (rom personal exemptions# only direct costs or o)erhead expenses incurred in the actual practice o( a pro(ession may e claimed #i.e. supplies# (uel# li*ht# electricity# salary# etc. ,pplyin* the a o)e considerations in the case at ar# it appears that amon* the expenses incurred y G# only the premiums he paid (or malpractice insurance 4uali(ies as a deducti le expense# the same ein* as ordinary and necessary expense in the pursuit o( a pro(ession as de(ined y <e)enue <e*ulations 3o. $. The tuition (ees (or pre1 ar classes and the ar examination (ees paid to the Supreme Court y G do not 4uali(y as deducti le expenses under <e)enue <e*ulations 3o. $. ,s (or the amount spent y G to entertain the +ud*e who decide his (irst case# the same may not e claimed as an expenses. , usiness expense to e deducti le must e sustained y ade4uate proo( and that the same must not e

a*ainst the law or pu lic policy (Consolidated /ines# -nc. )s. Court o( Tax ,ppeals. 51"II@7 $8 ,u*ust "8>9). A!ternati"e Answer: 3one o( these expenses are allowa le. Bith respect to indi)iduals en*a*ed in the practice o( a pro(ession# the 3-<C limits deductions only to direct costs incurred in the exercise o( the pro(ession# which costs do not include the items ein* claimed y G. ---------------------------------------------------------1-(. Sometime in Decem er "8I%# a taxpayer donated to his son 7#%%% shares o( stoc6 o( San /i*uel Corporation. Jor (ailure to (ile a donor.s return on the donation within the statutory period# the taxpayer was assessed the sum o( E"%$#%%%.%%# as donor.s tax plus $AF surchar*e o( E$A#A%%.%% and $%F interest or E$%#9%%.%% which he paid on June $9# "8IA. Cn ,pril "%# "8I@# he (iled his income tax return (or "8IA claimin* amon* others# a deduction (or interest amountin* to E8#A%%.%% and reported a taxa le income o( E8@#%%%.%%. Cn 3o)em er "%# "8I@# the taxpayer (iled an amended income tax return (or the same calendar year "8IA# claimin* therein an additional deduction in the amount o( E$%# 9%%. %% representin* interest paid on the donor.s *i(t tax. , claim (or re(und o( alle*ed o)erpaid income tax (or "8IA was (iled with the Commissioner which was su se4uently denied. Kpon appeal with the Court o( Tax ,ppeals# the Commissioner too6 issue with the Court o( Tax o( ,ppeal.s determination that the amount paid y the taxpayer (or interest on his delin4uent taxes is deducti le (rom the *ross income (or the same year pursuant to Sec. $8 ( )(") o( the 3ational <e)enue Code. The Commissioner o( -nternal <e)enue pointed out that a tax is not a inde tedness. He ar*ued that there is a (undamental distinction etween a tax and a de t. ,ccordin* to the Commissioner# the deducti ility o( interest on inde tedness (rom a person.s income tax cannot extend to interest on taxes. ") Bhat is your opinion on the ar*ument o( the Commissioner that a tax is not a inde tedness so that deducti ility on taxes should not e allowed2 (!"%# "88$ &ar 'xams) Suggested Answer: The Commissioner.s ar*ument is misplaced ecause the interest on the donor.s tax is not one that can e considered as ha)in* incurred in connection with the taxpayer.s trade# usiness or exercise o( pro(ession. A!ternati"e Answer: a) Bhile a tax may e considered a de t (or purposes o( deductin* (rom *ross income# the interest on taxes cannot e so considered# as such interest is in the nature o( a penalty# the imposition o( which is desi*ned to discoura*e delin4uent

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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payment o( taxes. To allow deducti ility o( such interest would e to diminished the puniti)e and deterrent e((ects o( the imposition# and thus to diminish the importance o( the prompt payment o( taxes. ) The ar*ument o( the Commissioner is wron*. &ecause while a tax as a *eneral rule is not a de t# interest on a non1payment o( a tax has een considered li6e interest on inde tedness y the Supreme Court. ( 3ote: Bhether or not the interest is deducti le under the present law is not apparently in 4uestion). $) Distin*uish etween the le*al concept o( taxes and de t. (!"%# "88$ &ar 'xams) Suggested Answer: , tax may e considered a de t in the Ci)il Code sense (or the (ollowin* purposes: a) Collection ein* en(orced y court action; ) Statute o( limitations ; and c) Deduction (rom *ross income. Strictly spea6in*# howe)er# a tax is not a de t that there can e no set1o(( etween the taxpayer and the =o)ernment. 7) Eursuant to the 3ational -nternal <e)enue Code# (or interest to e deducti le# what are the re4uirements to e met2 'xplain. Suggested Answer: Jor interest to re4uirements must e met: e deducti le# the (ollowin*

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

The E"#A%%.%% is not compensation income ecause compensation income arises out employer1employee relationship as payment (or ser)ices without compensation. The E"#A%%.%% is a *i(t (rom the la or union. ,ccordin* to Section $I ( )(7) o( the 3-<C# *i(ts are e excluded (rom *ross income. Thus# the &-<.s denial is not )alid. A!ternati"e Answer: Knder the law# *ross income consists o( all *ains# pro(its# and income o( the taxpayer durin* a taxa le year o( whate)er (orm deri)ed (rom any source# whether le*al or ille*al# except items o( *ross income su +ect to (inal income tax and income exempt (rom taxation under Sec. $I( ) o( the 3-<C. /oreo)er# in the case o( =uitierreD )s. Collector o( -nternal <e)enue# CT, Case 3o. @A# 7" ,u*ust "8@A# it was held that the phrase income (rom whate)er source deri)ed co)ers all other (orms o( income. -t discloses a le*islati)e policy to include all income not expressly exempted# as within the class o( taxa le income under our laws# irrespecti)e o( the )oluntary or in)oluntary action o( the taxpayer in producin* the *ains. There(ore ased on the (ore*oin* considerations# the ene(its su +ect in the case at ar# not expressly exempted y law# are considered as income.

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a) That there must1 e an inde tedness; ) That there is an interest on such inde tedness; c) Such interest was paid or accrued within the taxa le year; d) -nterest was paid on a de t related to one.s pro(ession# trade or usiness. ----------------------------------------------------------

1-*. G is a tra)elin* salesman in Jolo# Sulu. -n the course o( his tra)el# a and o( /35J seiDed his car y (orce and used it to 6idnap a (orei*n missionary. The next day# G learned that the military and the /35J and had a chance encounter. Ksin* hea)y weapons# the military (ired at the /35J and that tried to escape with the use o( G.s car. ,ll the mem ers o( the and died and G.s car was a total wrec6. Can G deduct the )alue o( his car (rom his income as casualty loss2 <easons. (!@# "887 &ar 'xams) Suggested Answer: Sec. $8(i)(c) o( the 3ational -nternal <e)enue Code pro)ides that in cases o( the indi)idual taxpayers# losses to e deducti le must e: a) actually sustained and char*ed o(( within the taxa le year;

1-). The employees o( Tra)ellers# -nc. sta*ed a stri6e. G # a non1union mem er +oined the stri6e and )olunteered to pic6et the company premises (rom I:%% ,./. to "$:%% E./.# /onday to Jriday. Six months into the stri6e# G ran out o( money and as6ed (inancial aid (rom the union since he has no other source o( income and needed (inancial assistance in order to li)e. The union *a)e him E"#%%%.%% a month to ta6e care o( his (ood re4uirements plus EA%%.%% to ta6e care o( his monthly rent. Bhen G (iled his return# he excluded these ene(its (rom his *ross income. The exclusion was denied y the &-<. Decide. (!9# "887 &ar 'xams) Suggested Answer:

) ha)e een incurred in the trade# pro(ession or usiness or in any transaction entered into (or pro(it# thou*h not connected with trade# pro(ession or usiness; c) e)idenced y a closed and complete transaction. /oreo)er# Sec. " o( <e)enue <e*ulations 3o. "$1>># de(ined casualty as complete or partial destruction o( property resultin* (rom an identi(ia le e)ent o( sudden# unexpected# or unusual nature. -t denotes accidents# some sudden in)asion y hostile a*ency# and excludes pro*ressi)e deterioration. &ased on the a o)e1mentioned laws and the circumstances o( the case at the ar# the )alue o( the wrec6ed car is deducti le

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

*,
as casualty loss# pro)ided the re*ulations *o)ernin* su stantiation re4uirements (or losses are complied with. A!ternati"e Answer: 3o. Bith respect to indi)iduals en*a*ed in usiness# the 3-<C limits deductions only to certain direct costs incurred in connection with the usiness# which costs# howe)er# do not include casualty losses.

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

The money paid to please the director is not deducti le. This is a (orm o( ri ery. Deductions shall not e allowed i( the expense is contrary to law# pu lic policy or (or immortal purposes. (Oamora )s. Collector# SC<, "@7; <oxas )s. CT, SC<, $>@). A!ternati"e Answers: a) 3o. The money *i)en to the director was paid merely to please him and was not paid (or ser)ices actually rendered and there(ore does not 4uali(y as compensation (or ser)ices deducti le as ordinary and necessary expense. /oreo)er# deductions are allowa le only i( incurred (or le*al purposes. ) 3o. , taxpayer may not deduct a usiness expense which is a*ainst the law or pu lic policy. The payment made to the director is a ri e *i)en to a *o)ernment employee. &ri ery is a crime punisha le under the <e)ised Eenal Code. ----------------------------------------------------------

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1-+. G is employed as security *uard o( 'xcel Supermar6et# -nc. G li)es in a room within the compound o( 'xcel ut he is not char*ed any rent. The rental )alue o( the room is E7%%.%% a month. G wants your opinion on whether &-< can tax the )alue o( the (ree use o( his room. (!""# "887 &ar 'xams) Suggested Answer: The rental )alue o( the room is not taxa le. Section $.$ o( the <e)enue ,udit /emo Crder 3o. "1I> pro)ides that i( the lod*in* is (urnished in the usiness premises o( the employer and the employee is re4uired to accept such lod*in* as a condition o( his employment# then the )alue o( said lod*in* will e not taxa le. -t is merely (or the con)enience# com(ort and pleasure o( the employer. A!ternati"e Answer: a) The &-< may not tax the )alue o( the (ree use o( the room# as the same may not strictly e considered compensation income. Considerin* the nature o( G.s employment and the (act that the (ree lod*in* was (urnished within the usiness premises# it may reasona ly e said that the ene(it there(rom inured to the employer more than to G and thus may not actually e considered renumeration (or ser)ices included in the computation o( the taxa le income. ) -t depends. -( the lod*in* (urnished to employee G is within the usiness premises o( the employer and the employee is re4uired to accept the lod*in* as condition (or employment the imputed rental )alue o( the room used y G shall e excluded (rom G.s compensation income (&-< ,udit /emo "1I>). ----------------------------------------------------------

ESTATE TA=
111. Discuss the rule on situs o( taxation with respect to the imposition o( the estate tax on property le(t ehind y a non1 resident decedent. (!"Aa# $%%% &ar 'xams) Suggested Answer: The )alue o( the *ross estate o( a non1resident decedent who is a Jilipino citiDen at the time o( his death shall e determined y includin* the )alue at the time o( his death o( all property# real or personal# tan*i le or intan*i le# where)er situated to the extent o( the interest therein o( the decedent at the time o( his death (Sec. IA ,# 3-<C o( "88>). These properties shall ha)e a situs o( taxation in the Ehilippines hence su +ect to Ehilippine estate tax. Cn the other hand# in the case o( a non1resident decedent who at the time o( his death was not a citiDen o( the Ehilippines# only that part o( the entire *ross estate which is situated in the Ehilippines to the extent o( the interest therein o( the decedent at the time o( his death shall e included in his taxa le estate. Ero)ided# that# with respect to intan*i le personal property# we apply the rule o( reciprocity. ---------------------------------------------------------11 . /r. Jelix dela CruD# a achelor resident citiDen# su((ered (rom a heart attac6 while on a usiness trip to the KS,. He died intestate on June "A# $%%% in 3ew :or6 City# lea)in* ehind real properties situated in 3ew :or6; his (amily home in /a6ati City; shares o( stoc6s in San /i*uel Corporation; cash in an6; and personal elon*in*s. The decedent is hea)ily insured with -nsular 5i(e. He had no 6nown de ts at the time o( his death. ,s the sole heir and appointed ,dministrator# how would you determine the *ross estate o( the decedent2 Bhat deductions may e claimed y the estate and when and where shall the return e (iled and estate tax paid2 (!"A # $%%% &ar 'xams)

1-,. G is the proprietor o( 0an*uard# which is a security and detecti)e a*ency. G was a le to *et the contract to pro)ide the security ser)ices o( a *o)ernment a*ency. He si*ned the Security ,*reement with the director o( the *o)ernment a*ency callin* (or the deployment o( "%% security *uards on a $9 hour asis. The contract was re)oca le at the will o( the director. To please the director# G *i)es him at the end o( the month E"%%#%%%.%% per *uard hired. /ay G deduct (rom his income the money he paid to the director2 <easons. (!"$# "887 &ar 'xams) Suggested Answer:

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

*Suggested Answer: The *ross estate shall e determined y includin* the )alue at the time o( his death all o( the properties mentioned to the extent o( the interest he had at the time o( his death ecause he is a Jilipino citiDen. (Sec. IA,# 3-<C o( "88>) Bith respect to the li(e insurance proceeds# the amount includi le in the *ross estate (or Ehilippine tax purposes would e to the extent o( the amount recei)a le y the estate o( the deceased# his executor# or administrator# under policies ta6en out y decedent upon his own li(e# irrespecti)e o( whether or not the insured retained the power o( re)ocation# or to the extent o( the amount recei)a le y any ene(iciary desi*nated in the policy o( insurance# except when it is expressly stipulated that the desi*nation o( the ene(iciary is irre)oca le. (Sec. IA' 3-<C o( "88>) The deductions that may e claimed y the estate are: ". The actual (uneral expenses or in an amount e4ual to (i)e percent o( the *ross estate# whiche)er is lower# ut in no case to exceed E$%%#%%% (Sec. I@,(") 3-<C o( "88>) $. The +udicial expenses in the testate or intestate proceedin*s (Sec. I@,(") 3-<C o( "88>) 7. That )alue o( the decedent.s (amily home located in 0alle 0erde Easi* City in an amount not exceedin* one million pesos# and upon presentation o( a certi(ication o( the aran*ay captain o( the locality that the same ha)e een the decedent.s (amily home. (Sec. I@,(9) 3-<C o( "88>) 9. The standard deduction o( E"#%%%#%%%. (Sec. I@,(A) 3-<C o( "88>) A. /edical expenses incurred within one year (rom death in an amount not exceedin* EA%%#%%%. (Sec. I@,(@) 3-<C o( "88>) The estate tax return shall e (iled within six (@) months (rom the decedent.s death (Sec. 8% (&) 3-<C o( "88>)# pro)ided that the C-< shall ha)e authority to *rant in meritorious cases# a reasona le extension not exceedin* thirty (7%) days (or (ilin* the return. (Sec. 8%C 3-<C o( "88>) 'xcept in cases where the C-< otherwise permits# the estate tax return shall e (iled with an authoriDed a*ent an6# or <e)enue District C((icer# Collection C((icer# or duly authoriDed Treasure o( Easi* City# the City in which the decedent was domiciled at the time o( his death. (Sec. 8%(D) 3-<C o( "88>) ---------------------------------------------------------11#. ,# a*ed 8% years and su((erin* (rom incura le cancer# on ,u*ust "# $%%" wrote a will and# on the same day# made se)eral inter1)i)os *i(ts to his children. Ten days later# he died. -n your opinion# are the inter1)i)os *i(ts considered trans(ers in contemplation o( death (or purposes o( determinin* properties to e included in the *ross estate2 'xplain your answer. (!"A# $%%" &ar 'xams) Suggested Answer: :es. Bhen the donor ma6es his will within a short time o(# or simultaneously with# the ma6in* o( *i(ts# the *i(ts are considered as ha)in* een made in contemplation o( death (Ro!es v Posa as, /8 Phil 118). C )iously# the intention o( the donor in ma6in* the inter1)i)os *i(ts is to a)oid the imposition o( the estate tax and since the donees are li6ewise his (orced heirs who are called upon to inherit# it will create a presumption +uris tantum that said donations were made mortis causa# hence# the properties donated shall e included as part o( ,.s *ross estate.

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

---------------------------------------------------------11'. Cn the (irst anni)ersary o( the death o( :# his heirs hosted a sumptuous dinner (or his doctors# nurses and others who attended his last illness. The cost o( the dinner amounted to EA%#%%%. Compared to his *ross estate# the EA%#%%% did not exceed (i)e percent o( the estate. -s the cost o( the dinner to commemorate his one1year anni)ersary deducti le (rom his *ross estate2 'xplain your answer. (!"@# $%%" &ar 'xams) Suggested Answer: 3o. This expense will not (all under any o( the allowa le deductions (rom *ross estate. Bhether )iewed in the context o( either (uneral expenses or medical expenses# the same will not 4uali(y as deduction. Juneral expenses may include medical expenses incurred to commemorate the death anni)ersary. (>e 'u?man v >e 'u?man 84 2CRA 2/,). /edical expenses# on the other hand# are allowed only i( incurred y the decedent within one year prior to his death. (Sec. I@ ,@# 3-<C) ---------------------------------------------------------11(. -s the &-< authoriDed to collect estate tax de(iciency throu*h the summary remedy o( le)yin* upon and sale o( real properties o( a decedent without (irst securin* the authority o( the court sittin* in pro ate o)er the supposed will o( the decedent2 (!I# "88I &ar 'xams) Suggested Answer: :es. The &-< is authoriDed to collect estate tax de(iciency throu*h the summary remedy o( the le)yin* upon and sale o( properties o( a decedent# without the co*nition and authority o( the court sittin* in pro ate o)er the supposed will o( the deceased# ecause the collection o( estate tax is executi)e in character. ,s such the estate tax is exempted (rom the application o( the statute o( the non ? claims# and this is +usti(ied y the necessity o( the *o)ernment (indin*# immortaliDed in the maxim that taxes are the li(e lood o( the *o)ernment (/arcos ). C-<. =.<. 3o. "$%II%# June A# "88>). A!ternati"e Answer: :es# i( the tax assessment has already ecome (inal# executory and en(orcea le. The appro)al o( the court sittin* in pro ate o)er the supposed will o( the deceased is not a mandatory re4uirement (or the collection o( the estate tax. The pro ate court is determinin* issues which are not a*ainst the property o( the decedent# or a claim a*ainst the estate as such# ut is a*ainst the interest or property ri*ht which the heir# le*atee# de)isee# etc. has in the property (ormerly held y the decedent. (/arcos ). C-<. =.<. 3o. "$%II%# June A# "88>). ----------------------------------------------------------

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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11). Cn Septem er "%# "88"# , &an6 /ana*er o( people.s &an6# -nc. (E&-)# upon readin* an o ituary announcin* the death o( /r. <o erto DiaD re(used to allow one o( his heirs to withdraw /r. DiaD. deposit amountin* to E$ /illion. , wee6 later# immediately (ollowin* said denial# the administrator o( the estate sued the &an6H&an6 /ana*er to compel them to release the money since such act was ar itrary and constituted a denial o( propertyHconstitutional ri*hts. ". -( you are retained as counsel y the &an6H&an6 /ana*er to de(end their stand in re(usin* to release the E$ /illion to the heirs# what would you raise as a le*al de(ense2 Discuss. (!@# "88$ &ar 'xams) Suggested Answer: - would raise the de(ense that under Sec 8% o( the 3-<C# a an6 with 6nowled*e o( the death o( a person who maintains a deposit account with such an6 shall allow withdrawal there(rom only i( the mandatory re4uirement o( a certi(ication (rom the Commissioner that the taxes due thereon ha)e een paid could e presented y an heir. , sent such certi(ication# a an6 is authoriDed to withhold the release o( deposits o( a decedent. $. Knder the same set o( (acts# would you# as administrator o( the estate# rather (ile an administrati)e appeal; with the Commissioner o( -nternal re)enue or a petition (or re)iew with the Court o( Tax ,ppeals2 'xplain. (!@# "88$ &ar 'xams) Suggested Answer: ,n administrati)e appeal to the Commissioner o( -nternal <e)enue would not e a proper remedy without an ori*inal proceedin* ha)in* (irst een (iled with the &-<. , petition (or re)iew with the Court o( Tax ,ppeals# on the other hand# re4uires a (inal decision o( the Commissioner# the CT, ein* a court o( exclusi)e appellate +urisdiction. ,s administrator# - would cause the payment o( the proper taxes on the deposits and therea(ter# secure the re4uired certi(ication (rom the commissioner. 7. i( the Commissioner o( -nternal <e)enue allows the administrator o( the estate or the heirs o( the decedent to withdraw (rom the deposit account# what are the conditions under the Tax code which ha)e to e met (irst2 Suggested Answer: &e(ore withdrawals on deposits o( a decedent could e permitted# the proper taxes should (irst e paid and a certi(ication o( such payment secured (rom the Commissioner. Howe)er# the Commissioner may authoriDe the withdrawal without a certi(ication pro)ided the amount to e withdrawn shall not exceed E"%#%%%.%% A!ternati"e Answer: Eayment o( the tax or the (ilin* o( a ond would# in su stance# e enou*h (or the Commissioner to allow the withdrawal. ----------------------------------------------------------

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

11*. ") ,re donations inter vivos and donations mortis !ausa su +ect to estate taxes2 (!$# "889 &ar 'xams) Suggested Answer: ") Donations inter vivos are su +ect to donor.s *i(t tax (Sec. 8" (a) Tax Code) while donations mortis !ausa are su +ect to estate tax (Se. >># Tax Code). Howe)er# donations inter vivos actually constitutin* taxa le li(etime li6e trans(ers in contemplation o( death or re)oca le trans(ers (sec. >I ( ) and (c)# Tax Code) may e taxed (or estate tax purposes the theory ein* that the trans(eror.s control thereon extends up to the time o( his death. A!ternati"e Answer: ". Donations inter )i)os are not su +ect to estate taxes ecause the trans(er o( the property ta6e e((ect durin* the li(etime o( the donor. The trans(er is there(ore su +ect to the donor.s tax. Cn the other hand# donations mortis causa are su +ect to estate taxes since the trans(er o( the properties ta6es e((ect a(ter the death o( the decedent. Such donated properties# real or personal# tan*i le or intan*i le# shall (orm part o( the *ross estate. ----------------------------------------------------------

11+. ") Jose CrtiD owns "%% hectares o( a*ricultural land planted coconut trees. He decided on /ay 7%# "889. prior to his death# the *o)ernment# y operation o( law# ac4uired under the Comprehensi)e ,*rarian <e(orm 5aw all his a*ricultural lands except (i)e (A) hectares. Kpon the death o( CrtiD# his widow as6ed you how she will consider the "%% hectares o( a*ricultural land in the preparation o( the estate tax return. Bhat ad)ice will you *i)e her2 (!""# "889 &ar 'xams) $) Cli(( <o ertson# an ,merican citiDen# was permanent resident o( the Ehilippines. He died in /iami# Jlorida. He le(t "%#%%% shares to /eralco# a condominium unit at the Twin Towers &uildin* at Easi*# /etro /anila and a house and lot in 5os ,n*eles# Cali(ornia. Bhat assets shall e included in the 'state Tax <eturn to e (iled with the &-<2 (!$%# "889 &ar 'xams) Suggested Answer: ") The "%% hectares o( land that Jose CrtiD owned ut which prior to his death on /ay 7%# "889 were ac4uired y the *o)ernment under C,<E are no lon*er part o( his taxa le *ross estate# with the exception o( the remainin* (i)e (A) part o( decedent.s interest. $) ,ll o( /r. <o ertson.s assets consistin* "%#%%% shares in the /eralco# acondominium unit in E,si*# and his house and lot in 5oss ,n*eles# Cali(ornia are taxa le. The properties where)er situated (Secs. >>#>I and 8I# Tax Code.) ----------------------------------------------------------

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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11,. , died# sur)i)ed y his wi(e and three children. The estate tax was properly paid and the estate settled and di)ided and distri uted amon* the (our heirs. 5ater# the &-< (ound out that the estate (ailed to report the income recei)ed y the estate durin* administration. The &-< issued a de(iciency income tax assessment plus interest# surchar*es and penalties. Since the 7 children are residin* a road# the &-< sou*ht to collect the (ull tax de(iciency only a*ainst the widow. -s the &-< correct2 (!9a# "888 &ar 'xams) Suggested Answer: :es# the &-< is correct. -n a case where the estate has een distri uted to the heirs# the collection remedies a)aila le to the &-< in collectin* tax lia ilities o( an estate may either (") sue all the heirs and collect (rom each o( them the amount o( tax proportionate to the inheritance recei)ed or ($) y )irtue o( the lien created under Sec. $"8# sue only one heir and su +ect the property he recei)ed (rom the estate to the payment o( the estate tax. The &-< there(ore# is correct in pursuin* the second remedy althou*h this will *i)e rise to the ri*ht o( the heir who pays to see6 reim ursement (rom the other heirs &CIR v. Pine a 21 2CRA 11/). -n no case# howe)er# can the &-< en(orce the tax lia ility in excess o( the share o( the widow in the inheritance.

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

1 1. Bhen the donee or ene(iciary is a stran*er# the tax paya le y the donor shall e 7%F o( the net *i(ts. Jor purposes o( this tax# who is a stran*er2 (!"$a# $%%% &ar 'xams) Suggested Answer: , stran*er is a person who is not a : a. rother# sister (whether y whole or y hal(1 lood)# spouse# ascendant and lineal descendant; or . <elati)e y consan*uinity in the collateral line within the (ourth de*ree o( relationship (Sec. 8I& 3-<C o( "88>) ----------------------------------------------------------

1 . Bhat conditions must occur in order that all *rants# donations and contri utions to non1stoc6# non1pro(it pri)ate educational institutions may e exempt (rom the donor.s tax under Sec. "%"(a) o( the Tax Code2 (!"$ # $%%% &ar 'xams) Suggested Answer: The (ollowin* are the conditions: ". 3ot more than 7%F o( said *i(ts shall e used y such donee (or administration purposes; $. The educational institution is incorporated as a non1stoc6 entity# payin* no di)idends# *o)erned y trustees who recei)e no compensation# and de)otin* all its income# whether students. (ees or *i(ts# donations# su sidies or other (orms o( philanthropy# to the accomplishment and promotion o( the purposes enumerated in its ,rticles o( -ncorporation (Sec. "%" ,7 3-<C o( "88>)

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$9N9RAS TA=
1 -. ,# an indi)idual# sold to &# his rother in law# his lot with a mar6et )alue o( E"#%%%#%%% (or E@%%#%%%. ,.s cost in the lot is E"%%#%%%. & is (inancially capa le o( uyin* the lot. , also owns G Co.# which has a (ast *rowin* usiness. , sold some o( his shares o( stoc6 in G Co. to his 6ey executi)es in G Co. These executi)es are not related to ,. The sellin* price is E7#%%%#%%%# which is the oo6 )alue o( the shares sold ut with a mar6et )alue o( EA#%%%#%%%. ,.s cost in the shares sold is E"#%%%#%%%. The purpose o( , in sellin* the shares is to ena le his 6ey executi)es to ac4uire a propriety interest in the usiness and ha)e a personal sta6e in its usiness. 'xplain i( the a o)e transactions are su +ect to donor.s tax. (! 7# "888 &ar 'xams) Suggested Answer: The (irst transaction where a lot was sold y , to his rother1in1law (or a price elow its (air mar6et )alue will not e su +ect to donor.s tax i( the lot 4uali(ies as a capital asset. The trans(er (or less than ade4uate and (ull consideration# which *i)es rise to a deemed *i(t# does not apply to a sale o( property su +ect to capital *ains tax (Sec. "%% 3-<C). Howe)er# i( the lot sold is an ordinary asset the excess o( the (air mar6et )alue o)er the consideration recei)ed shall e considered as a *i(t su +ect to the donor.s tax. The sale o( shares o( stoc6 elow the (air mar6et )alue thereo( is su +ect to the donor.s tax pursuant to the pro)isions o( Sec. "%% o( the Tax Code. The excess o( the (air mar6et )alue o)er the sellin* price is a deemed *i(t. ----------------------------------------------------------

---------------------------------------------------------1 #. :our achelor client# a Jilipino residin* in NueDon City# wants to *i)e his sister a *i(t o( E $%%#%%%. He see6s your ad)ice# (or purposes o( reducin* i( not eliminatin* the donor.s tax on the *i(t# on whether it is etter (or him to *i)e all o( the E$%%#%%% on Christmas $%%" or to *i)e E "%%#%%% on Christmas $%%" and the other E "%%#%%% on January $%%$. Elease explain your ad)ice. (!"># $%%" &ar 'xams) Suggested Answer: - would ad)ise him to split the donation. =i)in* the E$%%#%%% as a one time donation would mean that it would e su +ect to a hi*her tax rac6et under the *raduated tax structure there y necessitatin* the payment o( donor.s tax. Cn the other hand# splittin* the donation into two e4ual amounts o( E"%%#%%% *i)en on two di((erent years will totally relie)e the donor (rom the donor.s tax ecause the (irst E"%%%#%%% donation in the *raduated rac6ets is exempt (Sec. 88 3-<C). Bhile the donor.s tax is computed on the cumulati)e donations# the a**re*ation o( all donations made y a donor is allowed only o)er one calendar year.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

('

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

---------------------------------------------------------1 '. ,n insol)ent company had an outstandin* o li*ation o( E"%%#%%%.%% (rom a creditor. Since it could not pay the de t# the creditor a*reed to accept payment throu*h dacion en pa*o a property which had a mar6et )alue o( E7%#%%%. -n the dacion en pa*o document# the alance o( the de t was condoned. (a) Bhat is the tax e((ect on the dischar*e o( the unpaid alance o( the o li*ation on the de tor corporation2 ( ) -nso(ar as the creditor is concerned# how is he a((ected tax wise as a conse4uence o( the transaction2 (!""# "88> &ar 'xams) Suggested Answer: (a) The condonation o( the unpaid alance o( the o li*ation has the e((ect o( a donation made on the part o( the creditor. -t is o )ious that the creditor merely desires to ene(it the de tor and without any consideration there(ore cancels the de t# the amount o( the de t cancelled is a *i(t (rom the creditor to the de tor and need not e included in the latter.s *ross income (Sec. A% << 3o. $); ( ) Jor the di((erence o( E>%#%%%# the creditor shall e su +ect to donor.s tax at the applica le rates pro)ided (or under the 3ational -nternal <e)enue Code. A!ternati"e Answer: (a) -( the dischar*e was prompted y the insol)ency o( the de tor company# then it is s clear case o( a write ? o(( o( a ad de ts which has no tax conse4uence to the de tor. ( ) The write 1 o(( o( the ad de t will entitle the creditor to claim the same as a deduction (rom its *ross income. ---------------------------------------------------------1 (. ,ce To acco Corporation ou*ht a parcel o( land situated at Eateros and donated it to the /unicipal =o)ernment o( Eateros (or the sole purpose o( de)otin* the said land as a relocation site (ro the less (ortunate constituents o( the said municipality. -n accordance therewith# the /unicipal =o)ernment o( Eateros issued to the occupantsH ene(iciaries Certi(icate o( ,ward *i)in* to them the respecti)e areas where their houses are erected. Throu*h Crdinance 3o. $# Series o( "88I# the said municipal *o)ernment ordained that the lots awarded to the awardeesHdonees e (inally trans(erred and donated to them. Determine the tax conse4uence o( the (ore*oin* disposition with respect to ,ce To acco Corporation# the /unicipal =o)ernment o( Eateros# and the occupantsH ene(iciaries. (!8# "88I &ar 'xams) Suggested Answer: The donation y the ,ce To acco Corporation is exempt (rom the donor.s tax ecause it 4uali(ies as a *i(t to or (or the use o( any political su di)ision o( the 3ational; =o)ernment (Section "%$ ($)# 3-<C). The con)eyance is

li6ewise exempt (rom documentary stamp trans(erred without consideration.

ecause it is

Since the donation is to e used as a relocation site (or the les (ortunate constituents o( the municipality# it may e considered as an underta6in* (or human settlements# hence the )alue o( the land may e deducti le in (ull (rom the *ross income o( the ,ce To acco Corporation i( in accordance to a 3ational Eriority Elan determine y the 3ational 'conomic De)elopment ,uthority (Section 79 RHS($)(a)# 3-<C). -( the utiliDation is not in accordance to a 3ational Eriority Elan determine y the 3'D, # then ,ce To acco corporation may deduct the )alue o( eth land donated only to the extent o( (i)e (AF) percent o( the taxa le income deri)ed (rom the trade or usiness as computed without the ene(it o( the donation. (Section 79 RHS($)(a)# 3-<C in relation to Sec. 79 RHS(")# 3-<C). The /unicipality o( Eateros is not su +ect to any donor.s tax on the )alue o( the land it su se4uently donated# it ein* exempt (rom taxes as a political su di)ision o( the 3ational =o)ernment. The occupantsH ene(iciaries are su +ect to real property taxes ecause they now own the land. A!ternati"e Answer on Taxa4i!it5 o/ <uni%i.a!it5 and Awardees: The awardin* y the /unicipality =o)ernment o( lots to speci(ic awardees or donees is li6ewise exempt (rom the donor.s tax ecause it is only an implementation o( the purpose (or which the property was *i)en y ,ce To acco Corporation. The purpose o( the (irst donation is to de)ote the land as a relocation site (ro the less (ortunate constituents. -( later on the /unicipal =o)ernment *i)es out Certi(icate o( ,ward o)er speci(ic lots occupied y the 4uali(ied occupantsH ene(iciaries# this is intended to perpetuate the purpose o( the pre)ious donor# the /unicipality actin* merely as conduit and not the true donor. This is simply a donation y the /unicipality in (orm ut not in su stance. The receipt y the occupant ene(iciaries o( their respecti)e lots throu*h the Certi(icate o( ,ward has no tax implications. They are# howe)er# lia le (or real property taxes. ----------------------------------------------------------

1 ). ,re contri utions to a candidate in an election su +ect to donor.s tax2 Cn the part o( the contri utor# is it allowa le as a deduction (rom the *ross income2 (!"9# "88I &ar 'xams) Suggested Answer: (a.) 3o# pro)ided the recipient candidate had compiled with re4uirement (ro (ilin* o( returns o( contri utions with the Commission o( 'lections as re4uired under the Cmni us 'lection Code. ( .) The contri utor is not allowed to deduct the contri utions ecause the said expenses is not directly attri uta le to the de)elopment# mana*ement# operations andHor conduct o( a trade# usiness or pro(ession (Sec. 79 (,)(")(a)# 3-<C). Jurthermore# i( the candidate is an incum ent *o)ernment o((icial or employee# it may e)en e considered as a ri e or a 6ic6 ac6 (Sec. 79 (,)(")(c)# 3-<C).

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

---------------------------------------------------------1 *. Cnyoc# an amateur oxer# won in a oxin* competition sponsored y the =old Cup oxin* Council# a sports association duly accredited y the Ehilippine oxin* ,ssociation. Cnyoc recei)ed the amount o( EA%%#%%%.%% as his priDe which was donated y ,yala land Corporation. The &-< tried to collect income tax on the amount recei)ed y Cnyoc and donor.s tax (rom ,yala 5and Corporation# which taxes. Cnyoc and ,yala 5and Corporation re(use to pay. Decide. (!"%# "88@ &ar 'xams) Suggested Answer: The priDe will not constitute a taxa le income to Cnyoc# hence the &-< is not correct in imposin* the income tax. <.,. no. >A98 explicitly pro)ides that ,ll priDes and awards *ranted to athletes in local and international sports tournaments and competitions held in the Ehilippines or a road and sanctioned y their respecti)e national sports associations shall e exempt (rom income tax. 3either is the &-< correct in collectin* the donor.s tax (rom ,yala 5and Corporation. The law is clear when it cate*orically stated That the donor.s o( said priDes and awards shall e exempt (rom the payment o( the donor.s tax. ---------------------------------------------------------1 +. Penneth :usoph owns a commercial lot which he ou*ht many years a*o (or E" /illion. -t is now worth E$% /illion althou*h the Donal )alue is only E"A /illion. He donates one1hal( pro1indi)iso interest in the land to his son Dino on 7" Decem er "889# and the other one1hal( pro1indi)iso interest to the sme son on $ January "88A. ".) How much is the )alue o( the *i(ts in "889 and "88A (or purposes o( computin* the *i(t tax2 'xplain. $.) The <e)enue District C((icer 4uestions the splittin* o( the donations into "889 and "88A. he says that since there were only two ($) days separatin* the two donations they should e treated as one# ha)in* een made within one year. -s he correct2 'xplain. 7.) Dino su se4uently sold the land to a uyer (or E$% /illion. How much did Dino *ain on the sale2 'xplain. 9.) Suppose# instead o( recei)in* the lot y way o( donation# Dino recei)ed it y inheritance. Bhat would e his *ain on the sale o( the lot (or E$% /illion2 'xplain. (!"A# "88A &ar 'xams) Suggested Answer: ".) The )alue o( the *i(ts (or the purposes o( computin* the *i(t tax shall e E>.A million in "889 and E>.A million in "88A. in )aluin* a real property (or *i(t tax purposes the property should e appraised at the hi*her o( the two )alues as o( the time o( donation which are (a) the (air mar6et )alue as determined y the Commissioner (which is the Donal )alue (ixed pursuant to Section "@(e) o( the Tax Code)# or ( ) the (air mar6et )alue as shown in the schedule o( )alues (ixed y the Ero)incial and City ,ssessors. The (act that the property is worth p$% million as o( the time o( donation is immaterial unless it can e shown that this )alue is one o( the two )alues mentioned as pro)ided under section I" o( the Tax Code.

$.) The <e)enue District C((icer is not correct ecause the computation o( the *i(t tax is cumulati)e ut only inso(ar as *i(ts made within the same calendar year. There(ore# there is no le*al +usti(ication (or treatin* two *i(ts e((ected in two separate calendar years as one *i(t. 7.) Dino *ained an income o( E"8 million (rom the sale. Dino ac4uires a carry1o)er asis which is the asis o( the property in the hands o( the donor or E" million. The *ain (rom the sale or other disposition o( property shall e the excess o( the amount realiDed there(rom o)er the asis or ad+usted asis (or determinin* *ain (Sec. 79(a)# 3-<C). Since the property was ac4uired y *i(t the asis (or determinin* *ain shall e the same as i( it would e in the hands o( the donor or the last precedin* owner y whom the property was not ac4uired y *i(t. Hence# the *ain is computed y deductin* the asis o( E" million (rom the amount realiDed which is E$% million. 9.) -( the commercial lot was recei)ed y inheritance the *ain (rom the sale (or p$% million is EA million ecause the asis id the (air mar6et )alue as o( the date o( ac4uisition. The stepped1up asis o( E"A million which is the )alue (or estate tax purposes is the asis (or determinin* the *ain (Sec. 79( )($)# 3-<C). A!ternati"e Answer: -( Dino held on to the property as a capital asset in that it is neither (or sale in the ordinary course o( usiness nor used in Dino.s usiness# then upon sale thereo( there is presumed to e realiDed an income o( E$% million which is the *ross sellin* price o( the property. (Sec $"(e)# 3-<C). The same would e su +ect to the AF capital *ains tax. ---------------------------------------------------------1 ,. -n "88"# -melda *a)e her parents a Christmas *i(t o( E"%%#%%%.%% and a donation o( EI%#%%%.%% to her parish church. She also donated a parcel o( land (or the construction o( a uildin* to the EKE ,lumni ,ssociation# a non1stoc6# non1pro(it or*aniDation. Eortions o( the uildin* shall e leased to *enerate income (or the association. ") -s the Christmas *i(t o( E"%%#%%%.%% to -melda.s parents su +ect to tax2 $) How a out the donation to the parish church2 7) How a out the donation to the EKE ,lumni ,ssociation2 (!I# "889 &ar 'xams) Suggested Answer: ") The Christmas *i(t o( E"%%#%%%.%% *i)en y -melda to her parents is taxa le up to EA%#%%%.%% ecause under the law (Sec. 8$ (a) o( the Tax Code)# net *i(ts not exceedin* EA%#%%%.%% are exempt. $) The donation o( EI%#%%%.%% to the parish church e)en assumin* that it is exclusi)ely (or reli*ious purposes is not tax1 exempt ecause the exemption *ranted under ,rticle 0-# Sec. $I(7) o( the Constitution applies only to real estate taxes (5ladoc ). Commissioner# "9 SC<, $8$) 7) The donation to the EKE ,lumni ,ssociation does not also 4uali(y (or exemption oth under Constitution and the a(ore ited law ecause it is not an educational or research or*aniDation# corporation# institution# (oundation or trust.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

(&
A!ternati"e Answer: Donations to the EKE ,lumni ,ssociation is exempt (rom donor.s tax i( it is pro)en that the association is a non1 stoc6# non1pro(it charita le association# payin* no di)idends# *o)erned y trustees who recei)e no compensation# and de)otin* all its income to the accomplishment and promotion o( the purposes enumerated in its articles o( incorporation. 3ot more than 7%F o( the *i(t should e used (or administration purposes y the donee. ----------------------------------------------------------

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

trans(erred the su +ect share to /r. <o ert James# the new consultant o( the (irm and the newly desi*nated playin* representati)e under a Deed o( Declaration o( Trust and ,ssi*nment o( Shares wherein the (ormer ac6nowled*ed the a solute ownership o( ,&C Computer Corp. o)er the share# that the assi*nment was without any consideration# and that the share was placed in his name ecause the Clu re4uired it to e done. -s the said assi*nment a *i(t and# there(ore# su +ect to *i(t tax2 (!I# "88" &ar 'xams) Suggested Answer:

1#-. /r. &ill /or*an# a Canadian citiDen and a resident o( Scar orou*h# Cntario# send a *i(t chec6 o( L$%#%%%.%% to his (uture Jilipino dau*hter in law who is to e married to his only son in the Ehilippines. ". -s the donation y /r. /or*an su +ect to tax2 'xplain. (!># "88$ &ar 'xams) Suggested Answer: :es. Bhile the *i(t has een made on account o( marria*e# to 4uali(y (or exemption to the extent o( the (irst E"%#%%%.%% (now EA%#%%%.%%) o( the )alue thereo(# such *i(t should ha)e een *i)en to a le*itimate# reco*niDed natural or adopted child o( the donor. A!ternati"e Answer: -t is not su +ect to tax ecause the *i(t was made outside the Ehilippines. $. Bhat are the tax conse4uences i( any# to the donee (Jilipino dau*hter1in1law o( /r. /or*an)2 (!># "88$ &ar 'xams) Suggested Answer: The *i(t with respect to the donee# is excluded (rom =ross income and is exempt (rom income taxation. There is no donees. *i(t tax. 7. Can you name one 6ind o( *i(t that is exempt (rom donor.s tax which is extendi le to oth residents and non residents or non citiDens o( the Ehilippines2 -nclude 4uali(ications# i( any. Suggested Answer: =i(ts made to or (or the use o( the 3ational =o)ernment or any entity created y any o( its a*encies which is not conducted (or pro(it or to any political su di)ision o( the said =o)ernment are exempt (rom *i(t tax with respect to oth residents and non residents. ,&C Computer Corp.# purchased some years a*o /em ership Certi(icate 3o. > (rom the Cala ar =ol( Clu # -nc. (or E7%%#%%%.%%. -n 9 Septem er "8IA# it trans(erred the same to /r. John Johnson# its ,merican computer consultant# to ena le him to a)ail o( the (acilities o( the clu durin* his stay here. The consultancy a*reement expired two ($) years later. -n the mean time# the )alue o( the Clu share appreciated and what was purchased y the corporation at E7%%#%%%.%%# commanded a mar6et )alue o( EI%%#%%%.%% in "8I>. &e(ore he returned home a (ew days a(ter his tenure ended# /r. Johnson

The assi*nment can neither e held to e a *i(t. To e considered a *i(t within the context o( the 3-<C# there must e a trans(er o( ownership or a 4uanti(ia le interest. /ore importantly# the trans(er o( the mem ership certi(icate was merely a desi*nation o( the consultant to e playin* representati)e o( ,&C Computer Corporation in the Cala ar =ol( Clu .

L9CAL TA=ATI9N
1#1. Con*ress a(ter much pu lic hearin* and consultation with )arious sectors o( society# came to the conclusion that it will e *ood (or the country to ha)e only one system o( taxation y centraliDin* the imposition and collection o( all taxes in the national *o)ernment. ,ccordin*ly# it is thin6in* o( passin* a law that would a olish the taxin* power o( all local *o)ernment units. -n your opinion# would such law e )alid under the present Constitution2 'xplain your answer. (!"8# $%%" &ar 'xams) Suggested Answer: 3o. the law centraliDin* the imposition and collection o( all taxes in the national *o)ernment would contra)ene the Constitution which mandates that :')ery local *o)ernment unit shall ha)e the power to create their own sources o( re)enue and to le)y taxes# (ees# and char*es su +ect to such *uidelines and limitations as the Con*ress may pro)ide consistent with the asic policy o( local autonomy. -t is clear that Con*ress can only *i)e the *uidelines and limitations on the exercise y the local *o)ernments o( the power to tax ut what was *ranted y the (undamental law cannot e withdrawn y Con*ress.

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REAL PR9PERTB TA=


1# . =i)e at least $ (undamental principles *o)ernin* real property taxation# which are limitations on the taxin* power o( local *o)ernments inso(ar as the le)yin* o( the realty tax is concerned. (!"8a# $%%% &ar 'xams) Suggested Answer: Two (undamental principles *o)ernin* real property taxation are:

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

(*
". $. The appraisal must e at the current and (air mar6et )alue; and Classi(ication (or assessment must e on the asis o( actual use (Sec. "8I# 5ocal =o)ernment Code)

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

lot with an area o( 7$I s4. meters is descri ed and co)ered y TCT 3o. 9>78 o( the <e*istry o( Deeds o( 3a*a City. Cn Septem er "$# "8>># a ""A s4. meter portion o( 'dna.s property was expropriated y the <epu lic o( the Ehilippines (or the sum o( E@#>%%.%% representin* the assessed )alue o( the a(oresaid portion. This amount was deposited y the =o)ernment in 'dna.s ,ccount. Jor almost ten years# 'dna (ailed to pay her real estate taxes on the same property. Thus# on 3o)em er A# "8>># her property was sold at pu lic auction y the City Treasurer o( 3a*a City to satis(y her real estate tax delin4uencies amountin* to EA#I%%.%%. The hi*hest idder (or the property was ,n*el Chua. 'dna was not present at the pu lic auction althou*h she later admitted ha)in* recei)ed the notice o( hearin* (or the petition (or entry o( a new certi(icate o( title y ,n*el Chua. (&oth the auction sale and the (inal ill o( sale were annotated at the ac6 o( TCT 3o. 9>78 y the <e*ister o( Deeds.) Cn /arch "A# "8>8# 'dna (iled a complaint to annul the auction sale which was denied y the CJ- Jud*e o( 3a*a City. -n (act the CJ- Jud*e ordered the TCT ! 9>78 o( 'dna e cancelled and that a new title e issued to ,n*el Chua. Cn appeal# the Court o( ,ppeal a((irmed the CJdecision in toto. 'dna then ele)ated the case to the Supreme Court citin* se)eral *ra)e errors o( law amon* which are: ". That her tax delin4uencies (in)ol)in* EA#I%%) (or non payment o( real estate taxes were o((set y the sum o( E@#>%%.%% which the *o)ernment o( the Ehilippines owed her. She claims that her tax delin4uencies ha)e een extin*uished y le*al compensation: $. That the price o( EA#I%%.%% paid y ,n*el Chua was *rossly inade4uate and that ecause o( its inade4uacy# the same is tantamount to depri)ation o( property without due process o( law: 7. That the pu lic auction made on her property is )oid. Discuss the merits o( the appeal. (!8# "88$ &ar 'xams) Suggested Answer: ". The decision o( the Court o( ,ppeals a((irmin* the CJ- decision must e a((irmed. Cn the procedural aspect# it has not een shown# as re4uired under the <eal Eroperty Tax Code that plainti(( has paid the amount (or which the real property has een sold plus interest. Cn the claim o( extinction o( tax ina ility y le*al compensation# there is +urisprudence to the e((ect that the doctrine o( e4uita le recoupment does not apply in this +urisdiction. ,ssumin* it does# the (acts o( the case ear out that the *o)ernment does not owe the plainti(( any amount.

A!ternati"e Answer: ". ,ssessment must e on the asis o( uni(orm classi(ication $. ,ppraisal# assessment# le)y and collection shall not e let to pri)ate persons; and 7. ,ppraisal and assessment must e e4uita le. (Sec. "8I# 5ocal =o)ernment Code) ---------------------------------------------------------1##. /ay the local *o)ernments impose an annual realty tax in addition to the asic real property tax on idle or )acant lots located in residential su di)isions within their respecti)e territorial +urisdictions2 (!"8 # $%%% &ar 'xams) Suggested Answer: 3ot all local *o)ernment units may do so. Cnly pro)inces# cities and municipalities within the /etro /anila ,rea (Sec. $7$# 5=C) may impose an ad )alorem tax not exceedin* (i)e percent o( the assessed )alue (Sec. $7@ 5=C) o( idle or )acant residential lots in a su di)ision# duly appro)ed y proper authorities re*ardless o( area. (Sec. $7> 5=C) ---------------------------------------------------------1#'. Knder ,rticle 9"A o( the Ci)il Code# in order (or machinery and e4uipment to e considered real property# they must e placed y the owner o( the land and# in addition# must tend to directly meet the needs o( the industry or wor6s carried on y the owner. Cil companies# such as Caltex and Shell install under*round tan6s in the *asoline stations located on land leased y the oil companies (rom others. ,re those under*round tan6s which were not placed there y the owner o( the land ut which were instead placed there y the lessee o( the land# considered real property (or purposes o( real property taxation under the 5ocal =o)ernment Code2 'xplain your answer. (!$%# $%%" &ar 'xams) Suggested Answer: :es. The under*round tan6s althou*h installed y the lessee are considered as real property (or purposes o( the imposition o( real property taxes. -t is only (or purposes o( executin* a (inal ad+ustment that these machinery and e4uipment# installed y the lessee on the leased land# would not e considered as real property. &ut in the imposition o( the real property tax# the under*round tan6s are taxa le as necessary (ixtures o( the *asoline station without which the *asoline station would not e operational. &Caltex Phils. In!. v C9AA 11+ 2CRA 29,) ----------------------------------------------------------

1#(. /rs. 'dna Dinoso is the re*istered owner o( a residential lot with two storey house situated in 3a*a City. The

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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$. Cn the claim that the price (or the property was *rossly inade4uate# the <eal Eroperty Tax Code speci(ically mentions that the sale o( real property at pu lic auction is to satis(y all the taxes and penalties due and cost o( sale (sec. >7). Thus# the sellin* price is ased not on the (air mar6et )alue o( the property sold at pu lic auction ut the amount o( real property taxes due thereon. -n any case# the delin4uent taxpayer is *i)en one year (rom the date o( re*istration o( the sale within which to redeem the property y payin* the taxes due plus costs and interest. 7. Cn the claim that the pu lic auction made on the property is )oid# the <eal Eroperty Tax code pro)ides (sec. I7# $nd par.) that a court shall not declare a sale in)alid due to irre*ularities in the proceedin*s unless such irre*ularities ha)e impaired the su stantial ri*hts o( the taxpayer. -n the case at ar# the plainti(( recei)ed a notice o( hearin* (or the petition (or entry o( a new certi(icate o( title durin* which she could ha)e 4uestioned any irre*ularity in the conduct o( the sale. ----------------------------------------------------------

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SAINT LOUIS UNIVERSITY BAR OPERATIONS

ordinance (or more than one hundred twenty days a(ter his receipt thereo(# the le*ality o( the ordinance can no lon*er e 4uestioned and insisted on the collection o( tax. ") -s the tax ordinance in 4uestion le*al2 (!"@# "88" &ar 'xams)

Suggested Answer: 3o# the tax ordinance is not le*al as the 5ocal Tax Code allows pro)inces and cities# to the exclusion o( municipalities# to impose an annual occupation tax on all persons en*a*ed in the exercise or practiced o( their pro(ession or callin* in speci(ied amounts which in the case o( lawyers is E7%% per annum (Secs. "" and "$ in relation to Sec. $7# 5ocal Tax Code). , person authoriDed to practice his pro(ession or callin* shall pay the tax to pro)ince where he practices his pro(ession or callin* or maintains his o((ice. 3o local *o)ernment unit can impose a tax on income (Sec. A# 5ocal Tax Code). $) -s the /unicipality correct in insistin* collectin* the tax2 (!"@# "88" &ar 'xams) Suggested Answer: 3o# the /unicipality was incorrect in insistin* on the collection o( the tax. Cnce the tax on occupation is paid as stated in para*raph (a)# a o)e# the lawyer is entitled to practice his pro(ession or callin* in all parts o( the Ehilippines without ein* su +ect to any other national or local tax# license or (ee (or the practice o( such pro(ession or callin*. 7) Bill the inaction o( the Secretary o( Jinance ar the pro(essional in the /unicipality (rom 4uestionin* the le*ality o( that ordinance2 Suggested Answer: The inaction o( the Secretary o( Jinance does not ar the pro(essional in the /unicipality (rom 4uestionin* the le*ality o( the ordinance. Bhile it is true that Secretary o( Jinance may himsel( suspend the tax ordinance within the "$% day period (rom receipt thereo(# his (ailure to do so# ad)ersely a((ected y the ordinance. 9) Bhat remedies are a)aila le to the taxpayer to ena le him to 4uestion the le*ality o( the ordinance2 Suggested Answer: The taxpayer may pursue his remedies either administrati)ely or +udicially. He may# as the case warrants# (ile a (ormal protest with the Secretary o( Jinance 4uery with the Ero)incial Jiscal whose opinion is appeala le to the Secretary o( Justice whose decision may e contested in the proper court. The other remedy would e to (ile special ci)il action (or declaratory relie( (i( circumstances still warrant) or to pay the tax and therea(ter to (ile an action (or re(und within six (@) years a(ter such payment. A!ternati"e Answer: Cn the asis o( the (acts o( the pro lem# it would appear that the administrati)e remedy is no lon*er a)aila le

1#). A6 The /unicipality o( /alolos passed an ordinance imposin* a tax on any sale or trans(er o( real property located within the municipality at a rate o( one1(ourth ("H9) o( one percentum ("F) o( the total consideration o( such transactions. G sold a parcel o( land in /alolos which he inherited (rom his deceased parents and re(used to pay the a(oresaid tax. He instead (iled appropriate case as6in* that the ordinance e declared null and )oid since such a tax can e collected y the national *o)ernment# as in (act he has paid &-< the re4uired capital *ains tax. The municipality countered that under the Constitution# each local *o)ernment is )ested with the power to create its own source o( re)enue and to le)y taxes# and it imposed the su +ect tax in this exercise o( said constitutional authority. <esol)e the contro)ersy. (!"A# "88" &ar 'xams) Suggested Answer: The ordinance passed y the /unicipality o( /alolos imposin* a tax on the sale or trans(er o( real property is )oid. The 5ocal Tax Code only allows pro)inces and cities to impose a tax on the trans(er o( ownership o( real property (Sec. > and Sec. $7# 5ocal Tax Code). /unicipalities are prohi ited (rom imposin* said tax that pro)inces are speci(ically authoriDed to le)y. (Sec. $$# 5ocal Tax Code). Bhile it is true that the Constitution has *i)en road powers o( taxation to local *o)ernment units# this dele*ation# howe)er# is su +ect to such limitations as may e pro)ided y law (Sec. A# ,rt. G# "8I> Constitution). @6 The /unicipality o( ,r*ao# Ero)ince o( Ce u passed a tax ordinance re4uirin* all pro(essionals practicin* in the municipality to pay tax e4ui)alent to two ($F) percent o( their *ross income. , certi(ied true copy o( the ordinance was sent to Secretary o( Jinance (or re)iew on " /arch "8I8 and was recei)ed y him on the same day. Cn "A ,u*ust "8I8# e)en as the tax ordinance remain unacted upon y the Secretary o( Jinance# the municipality started collectin* the tax in 4uestion. The mem ers o( the Ehilippine &ar in the municipality 4uestioned the le*ality o( the ordinance and sou*ht the suspension o( the collection o( the tax# ut the municipality ar*ued that since the Secretary has not ta6en any action o( the

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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since there is already an attempt to en(orce collection. The only remedy o( the taxpayer is to pay the tax and sue (or its reco)ery in the ordinary court. 8N9TE: :nder t1e .resent LGC& t1e a..ea! %on%erning t1e !ega!it5Cun%on%titutiona!it5 o/ a new!5 ena%ted ordinan%e s1ou!d 4e to t1e Se%retar5 o/ Dusti%e .ursuant to Se%. 1+* o/ t1e %ode.6 ----------------------------------------------------------

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

o( real estate taxes paid under protest. The City 4uestioned the +urisdiction o( the Court. Decide. (!"8# "887 &ar 'xams) Suggested Answer: Section @$ o( the <eal Eroperty Tax Code pro)ides that: Section @$. Eayment under protest.1 a) Bhen a taxpayer desires (or any reason to pay his tax under protest# he shall indicate the amount or portion thereo( he is contestin* and such protest shall e annotated on the tax receipts y writin* thereon the words paid under protest. 0er al protests shall e con(irmed in writin*# with a statement o( the *round# there(or# within thirty days. The tax may e paid under protest# and in such case it shall e the duty o( the Ero)incial# City or /unicipal Treasurers to annotate the *round or *rounds there(or on the receipts. ) -n the case o( payments under protest# the amount or portion o( the tax contested shall e held in trust y the treasurer and the di((erence shall e treated as re)enue. c) -n the e)ent that the protest is (inally decided in (a)or o( the *o)ernment the amount or portion o( the tax held in trust y the treasurer shall accrue to the re)enue account# ut i( the protest shall e decided (inally in (a)or o( the protestant# the amount or portion o( the tax protested or applied as tax credit to any other existin* or (uture tax lia ility o( the said protestant. ('mphasis Supplied). -( the owner is not satis(ied with the action o( the pro)incial or city assessors in the assessment o( his property# he may (ile an appeal to the &oard o( ,ssessment ,ppeals o( the pro)ince or city# within sixty (@%) days (rom the receipt o( the decision ( Section 7% o( the <eal Eroperty Tax Code). -( the owner is not satis(ied with the decision o( the &oard o( ,ssessment ,ppeals # he may appeal the said decision to the Central &oard o( ,ssessment ,ppeals within thirty (7%) days a(ter the receipt o( the decision (Section 79 and 7@ o( the <eal Eroperty Tax Code). ,s enunciated in the case o( 0ictorias /illin* Co.# -nc.# )s. Court o( Tax ,ppeals $$ SC<, "%%I#"%%"("8@I): 1 -t is settled in our +urisdiction that where an assessment is ille*al and )oid# the remedy o( the taxpayer# who has already paid the realty tax under protest# is sue (or re(und in the competent court o( (irst instance. Cn the other hand# where the assessment is merely erroneous# his recourse is to (ile an appeal in the Ero)incial &oard o( ,ssessment ,ppeals within @% days (rom receipt o( the assessment. (Knderscorin* Supplied) in )iew o( the (ore*oin*# the le*al recourse o( G is to appeal the decision o( the City Treasurer to the &oard o( ,ssessment appeal# and not to (ile an action (or sum o( money andHor reco)ery o( real estate taxes. Hence# the <e*ional Trial Court has +urisdiction o)er the complaint (iled y G. A!ternati"e Answers: a) The <e*ional Trial Court has +urisdiction. -t has een held that the re*ular court ha)e +urisdiction o)er actions (or

1#*. -n )iew o( the street widenin* and cementin* o( roads and the impro)ement o( draina*e and sewers in the district o( 'rmita# the City Council o( the City o( /anila passed an ordinance imposin* and collectin* special le)y on lands in the district# Jose <eyes# a land owner and resident o( 'rmita# su mitted a protest a*ainst the special le)y (i(teen ("A) days a(ter the last pu lication o( the ordinance alle*in* that the special le)y was exor itant since the rate thereo( was more than the maximum rate o( two ($F) percent o( the assessed )alue o( the real properties allowed y Section 78 o( E.D. 9@9# as amended. ,ssumin* that Jose <eyes is a le to pro)e that the rate o( the special le)y is more than the a(oresaid percenta*e limitation o( $F# will his protest prosper2 (!"># "88" &ar 'xams) Suggested Answer: The special le)y under the <eal Eroperty Tax Code on lands# specially ene(ited y the proposed in(rastructure# may not exceed sixty percent (@%F) o( the cost o( said impro)ement. ,ll lands comprised within the district ene(ited are su +ect to the special le)y except lands exempt (rom the real property tax (Sec. 9># <ET). The protest shall e (iled not later than thirty days a(ter the pu lication o( ordinance and may e su mitted to the City San**unian si*ned y a ma+ority o( the land owners a((ected y the proposed wor6. -( such no protest is (iled in the manner a o)e speci(ied# the city ordinance shall ecome (inal an e((ecti)e. The le)y imposed under the ordinance should e within the limit o( sixty percent (@%F) o( the total cost o( the proposed impro)ement. The rate o( two percent ($F) o( the assessed )alue under Section 78 o( E.D. 9@9 re(ers to the real property tax and not to specials le)ies. ---------------------------------------------------------1#+. Cn Je ruary "7# "8@8# G# o tained a loan o( EI%%#%%%.%% (rom the =S-S secured y the mort*a*e o( a parcel o( land includin* its impro)ements. G (ailed to pay the loan. The loan was (oreclosed and sold pu lic auction to the =S-S as the hi*hest idder. G (ailed to redeem the lot and the =S-S consolidated its title to the lot in "8>>. -n "8>># howe)er# the =S-S allowed G to repurchase the lot. ,(ter assessment y the City ,ssessor# the City Treasurer o( /anila re4uired G to pay the real estate taxes due on the lot (or the years "8>> and "8>I. G paid under protest. Cn Septem er A# "8>8# x sent a demand letter to the City Treasurer (or re(und. The demand was re(used. G then (iled the <e*ional Trial Court a complaint a*ainst the City o( /anila (or a sum o( money andHor reco)ery

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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re(und o( real estate taxes paid under protest on the *round o( solutio in e"iti ) The <TC does not ha)e +urisdiction o)er the matter. Section 7% o( ED. 3o. 9@9 (The <eal Eroperty Tax Code) prescri es the proper remedy o( the taxpayer. -t re4uires G# who is not satis(ied with the action o( the city assessor # to appeal his case to the 5ocal &oard o( ,ssessment ,ppeal within sixty days (rom date or receipt y G o( the written notice denyin* his re4uest (or re(und o( real property taxes paid. ----------------------------------------------------------

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

(d) Discriminatory or <etaliatory Duty ? This is a duty imposed on imported *oods whene)er it is (ound as a (act that the country o( ori*in discriminates a*ainst the commerce o( the Ehilippines in such a manner as to place the commerce the Ehilippines at a disad)anta*e compared with the commerce o( any (orei*n country. ---------------------------------------------------------1'1. The Tari(( and Customs code allows the &ureau o( Customs to resort to the administrati)e remedy o( seiDure# such as y en(orcin* the tax lien on the imported article# and to the +udicial remedy o( (illin* o( action in court. Bhen does the &ureau o( Customs normally a)ail o( itsel( 111 (a) o( the administrati)e# instead o( the +udicial remedy# or ( ) o( the latter# instead o( the (ormer# remedy2 (!"I# "88> &ar 'xams) Suggested Answer: (a) The &ureau o( customs normally a)ails itsel( o( the administrati)e remedy o( seiDure# such as y en(orcin* the tax lien on the imported articles. -nstead o( the +udicial remedy when the *oods to which the tax lien attaches# re*ardless o( ownership# is still in the custody or control o( the =o)ernment. -n the case# howe)er# o( importations which are prohi ited or undeclared# the remedy o( seiDure and (or(eiture may still e exercised y the &ureau o( Customs e)en i( the *oods are no lon*er in its custody. ( ) Cn the other hand# when the *oods are properly released and thus eyond the reach o( tax lien # the *o)ernment can see6 payment o( the tax lia ility throu*h +udicial remedies.

TARI77 AN$ C:ST9<S C9$E


1#,. Cn the asis o( a warrant o( seiDure and detention issued y the Collector o( Customs (or the purpose o( en(orcin* the Tari(( and Customs 5aws# assorted rands o( ci*arettes said to ha)e een ille*ally imported into the Ehilippines were seiDed (rom a store where they were openly o((ered (or sale. Dissatis(ied with the decision rendered a(ter hearin* y the Collector o( Customs on the con(iscation o( the articles# the importer (iled a petition (or re)iew with the Court o( Tax ,ppeals. The Collector mo)ed to dismiss the petition (or lac6 o( +urisdiction. <ule on the motion. (!$%a# $%%% &ar 'xams) Suggested Answer: /otion *ranted. The CT, has +urisdiction only o)er decisions o( the Commissioner o( Customs in cases in)ol)in* seiDures# detention or release o( property a((ected. (Sec. ># <, 3o. ""$A). There is no decision yet o( the Commissioner which is su +ect to re)iew y the CT,. ---------------------------------------------------------1'-. 'xplain rie(ly each o( the special customs duties authoriDed under the Tari((s and Customs Code. (!"># "88> &ar 'xams) ,nswer: The (ollowin* are the special duties imposed under the Tari(( and Customs Code: (a) Dumpin* Duty ? This is a duty le)ied on imported *oods where it appears that a speci(ic 6ind or class o( (orei*n article is ein* imported into or sold or is li6ely to e sold in the Ehilippines at a price less than its (air )alue; ( ) Counter)ailin* Duty ? This is a su sidy e4ual to the ascertained or estimated amount o( the su sidy or ounty or su )ention *ranted y the (orei*n country on the production# manu(acture# or exportation into the Ehilippines o( any article li6ely to in+ure an industry in the Ehilippines or retard or considera le retard the esta lishment o( such industry; (c) /ar6in* Duty ? This is a duty on an ad )alorem asis imposed (or improperly mar6ed articles. The law re4uires that (orei*n importation must e mar6ed in any o((icial lan*ua*e o( the Ehilippines the name o( the country o( ori*in o( the article;

---------------------------------------------------------1' . Knder the same (acts# could the importer (ile an action in the <TC (or reple)in on the *round that the articles are ein* wron*(ully detained y the Collector o( Customs since the importation was not ille*al and there(ore exempt (rom seiDure2 'xplain. (!$% # $%%% &ar 'xams) Suggested Answer: 3o. The le*islators intended to di)est the <TC o( the +urisdiction to reple)in a property which is a su +ect o( seiDure and (or(eiture proceedin*s (or )iolation o( the Tari(( and Customs Code otherwise# actions (or (or(eiture o( property (or )iolation o( the Customs laws could easily e undermined y the simple de)ice o( reple)in. (>ela -uente v >ela -uente, et al, 121 2CRA +//) There should e no unnecessary hindrance on the *o)ernment.s dri)e to pre)ent smu**lin* and other (rauds upon the Customs. Jurthermore# the <TC do not ha)e +urisdiction in order to render e((ecti)e and e((icient the collection o( import and export duties due the State# which

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

(ena les the *o)ernment to carry out the (unctions it has een instituted to per(orm. (@ao et al, v. CA, et al an !ompanion !ase, 2+9 2CRA 4/, +4) ---------------------------------------------------------1'#. Bhat do you understand y the term (lexi le tari(( clause as used in the Tari(( and Customs Code2 (!"I# $%%" &ar 'xams) Suggested Answer: The said term re(ers to the authority *i)en to the Eresident to ad+ust tari(( rates under Section 9%" o( the Tari(( and Customs Code# which is the ena lin* law that made e((ecti)e the dele*ation o( the taxin* power to the Eresident under the Constitution. ---------------------------------------------------------1''. Cn January "# "88@# armed with warrants o( seiDure and detention issued y the &ureau o( Custom# mem ers o( the customs en(orcement and security ser)ices coordinated with the NueDon City police to search the premises owned y a certain /r. Ho alon* Palayaan ,)enue# NueDon City# which alle*edly contained untaxed )ehicles and parts. Bhile inside the premises# the mem er o( the custom en(orcement and security ser)ices noted articles# which were not included in the list contained in the warrant. Hence# on January "A#"88@# an amended warrant and seiDure was issued. Cn January "A# "88@# the customs personnel started haulin* the articles pursuant to the amended warrant. This prompted /r. Ho to (ile a case (or in+unction and dama*es with a prayer (or a restrainin* order e(ore the <e*ional Trial Court o( NueDon City a*ainst the &ureau o( Customs on January $># "88@. on the same date# the trial court issued a temporary restrainin* order. ".) , motion to dismiss was (iled y the &ureau o( Customs on the *round that the <e*ional Trial Court has no +urisdiction o)er the su +ect matter o( the compliant claimin* that it was the &ureau o( Customs that has exclusi)e +urisdiction o)er it. Decide. (!"7# "88@ &ar 'xams) Suggested Answer: The motion to dismiss should e *ranted. SeiDure and (or(eiture proceedin*s are within the exclusi)e +urisdiction o( the Collector o( Customs to the exclusion o( re*ular Courts. <e*ional Trial Courts are de)oid o( competence to pass upon the )alidity or re*ularity o( seiDure and (or(eiture proceedin*s conducted y the &ureau o( Customs and to en+oin or otherwise inter(ere with these proceedin*s (<epu lic )s. CJT o( /anila R&ranch GG--S# =.<. 3o. 97>9># Septem er $# "88$: Jao )s. C,. =.<. 3o. "%9@%9; Ccto er @# "88A). ---------------------------------------------------------1'(.

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

Bhen does importation e*in and when does it end2 (!"@# "88A &ar 'xams) Suggested Answer: -mportation e*ins (rom the time the carryin* )essel or aircra(t enters Ehilippine territorial +urisdiction with the intention to unload therein and ends at the time the *oods are released or withdrawn (rom the customhouse upon payment o( the customs duties or with le*al permit to withdraw (0iduya )s. &erdia*o# >7 SC<, AA7). ----------------------------------------------------------

1'). -n smu**lin* a shipment o( *arlic# the smu**lers used an ei*ht1wheeler tuc6 which they hired (or the purpose o( ta6in* out the shipment (rom the customs Done. Danny# the truc6 owner# did not ha)e a certi(icate o( pu lic con)enience to operate his truc6in* usiness. Danny did not 6now that the shipment o( *arlic was ille*ally imported. Can the Collector o( Customs o( the port seiDe and (or(eit the truc6 as an instrument in the smu**lin*2 (!A# "889 &ar 'xams) Suggested Answer: :es# the Collector o( Customs o( the port seiDe and (or(eit the truc6 as an instrument in the smu**lin* acti)ity since the same was used unlaw(ully in the importation o( smu**lin* articles. The mere carryin* o( such articles on oard the truc6 (in commercial 4uantities) shall su +ect the truc6 to (or(eiture# since it was not ein* used as a duly authoriDed common carrier# which was chartered or leased as such. (Sec. $A7% RaS TCC). /oreo)er# althou*h (or(eiture o( the )ehicle will not e e((ected i( it is esta lished that the owner thereo( had no 6nowled*e o( or participation in the unlaw(ul act# there arises a prima $a!ie presumption or 6nowled*e or participation i( the owner is not in the usiness (or which the con)eyance is *enerally used. Thus# not ha)in* a certi(icate o( pu lic con)enience to operate a truc6in* usiness# he is le*ally deemed not to ha)e een en*a*ed in the truc6in* usiness. (Sec. $A7"# Tari(( and Customs Code). ----------------------------------------------------------

1'*. Sometime in "A Septem er "88%# a shipment o( "A% pac6a*es o( imported *oods and personal e((ects arri)ed and was unloaded at the Eort o( /anila. ,(ter the amount o( E"A#II>.%% was paid y the consi*nee as customs duties# internal re)enue taxes# (ees and other char*es# the pac6a*es were released (rom the Customs house. ,s the pac6a*es were ein* transported (rom the Customs area to their destination# the truc6 carryin* them was intercepted at T./. Palaw St.# 'rmita# /anila y a*ents o( the 'conomic -ntelli*ence and -n)esti*ation &ureau ('--&). -n a (ormal communication# '--& in(ormed the Collector o( Customs that the pac6a*es were released (rom the customs Done without proper appraisal to the dama*e o( the =o)ernment and re4uested (or the issuance o( the necessary warrant o( the seiDure. SeiDure proceedin*s (S.-. 3o. >8@) was then instituted and the Collector o( Customs issued a warrant o( seiDure and detention.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

(.

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

Durin* the pro*ress o( the search and seiDure# and while the *oods were ein* remo)ed y the Customs a*ents (rom the ode*as where they were stored# the consi*nee (iled a Eetition (Ci)il Case 3o. $79) with the <e*ional Trial Court o( /anila as6in* that the Collector o( Customs and all his a*ents e restrained (rom the (urther en(orcin* the a(oresaid warrant and (rom proceedin* with the trial o( S.-. >8@# and that said warrant e declared null and )oid since the Collector no lon*er had +urisdiction to issue the same considerin* that the customs duties and taxes had already een paid and the *oods had le(t the control and +urisdiction o( the &ureau o( Customs. ") Did the Collector o( Customs ha)e +urisdiction to issue the warrant o( seiDure and detention2 (!"7# "88" &ar 'xams) Suggested Answer: Cn the assumption that the *oods were released (rom Customs custody without proper appraisal as contended y '--&# the Collector o( Customs had +urisdiction to issue the warrant o( seiDure and detention. This remedy is *enerally a)aila le in importations tainted with irre*ularity (Sec. $A7"# TCC; 0iduya )s. &erdia*o# >7 SC<, AA7). $) Did the payment o( the customs duties# taxes# etc. render ille*al and improper the issuance o( the said warrant2 Suggested Answer: -n seiDure and (or(eiture# the payment o( customs duties# taxes# etc.# does not necessarily render irre*ular and improper the issuance o( a warrant o( seiDure and detention. Bhat is conse4uential is whether there was# in (act# an irre*ularity committed in the importation o( the articles and their release (rom customs. 7) Has the <e*ional Trial Court +urisdiction to hear and decide Ci)il Case 3o. $792 Suggested Answer: 3o. the <TC has no +urisdiction. -n the case o( seiDures and (or(eitures# an ordinary court may not ta6e co*niDance o( the case and# there(ore# said courts would e ere(t o( +urisdiction to hear and decide the same. The +urisdiction o( the Collector o( Customs in seiDure and (or(eiture proceedin*s is exclusi)e o( all other courts. The proper remedy would e to *o throu*h with the hearin* o( the case with the Collector o( Customs (rom whose decision an appeal may e made to the Commissioner o( Customs and# therea(ter# the taxpayer still (eels a**rie)ed to the Court o( Tax ,ppeals. ----------------------------------------------------------

The procedure in seiDure cases may e summariDed as (ollows: The collector issues a warrant (or the detention or (or(eiture o( the imported articles; (Sec. $7%"# Tari(( and Customs Code). The Collector *i)es the importer a written notice o( the seiDure and (ixes a hearin* date to *i)e the importer an opportunity to e heard; (Sec. $7%7# TCC). , (ormal hearin* is conducted; (Sec. $7"$# TCC). The collector renders a declaration o( (or(eiture; (Sec. $7"$# TCC). The importer a**rie)ed y the action o( the Collector in any case o( seiDure may appeal to the Commissioner (or his re)iew within (i(teen ("A) days (rom written notice o( the Collector.s decision;(Sec. $7"7# TCC) The importer a**rie)ed y the action or rulin* o( the Commissioner in any case o( seiDure may appeal to the Court o( Tax ,ppeals; (Sec. $9%$# TCC) The importer ad)ersely a((ected y the decision o( the Court o( Tax ,ppeals may appeal to the Court o( ,ppeals within (i(teen ("A) days which may e extended (or another (i(teen ("A) days o( such period as the Court o( Tax ,ppeals may decide.

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1',. /H0 Jloria# a )essel o( Ehilippine re*istry# was hired to transport eans (rom Sin*apore to -ndia. The )essel was alle*edly hi+ac6ed at the sea and (ound its way to &ataan. -t is also alle*ed that said eans are now with the 5istCo# and (a6e documents were used to show that the eans were imported (rom Japan. The Collector o( Customs seiDed t he /H0 Jloria and its car*o. The owner o( /H0 Jloria (iled a complaint in the <e*ional Trial Court to o tain possession o( the )essel and eans# Does the <TC ha)e +urisdiction o)er the case2 (!8# "887 &ar 'xams) Suggested Answer: The <TC has no +urisdiction. The Collector o( Customs sittin* in seiDure and (or(eiture proceedin*s has exclusi)e +urisdiction to hear and determine all 4uestions touchin* on the seiDure and (or(eiture o( dutia le *oods. The <TC has no +urisdiction to pass upon the )alidity or re*ularity o( the seiDure and (or(eiture proceedin*s conducted y the &ureau o( Customs. ( Commissioner o( Customs )s. /a6asiar# ">> SC<, $># 77179 ("8I8) citin* Eacis )s# ,)eria# "I SC<, 8%>("8@@)) 3either has <TC re)iew powers o)er actions concernin* seiDure and (or(eiture proceedin*s conducted y the Collector o( Customs which is re)iewa le y the Commissioner

1'+. The Collector o( Customs instituted seiDure proceedin*s a*ainst a shipment o( motor )ehicles. State the procedure (or the re)iew o( the decision up to the Supreme Court o( the Collector o( Customs ad)erse to the importer. (!"9# "889 &ar 'xams) Suggested Answer:

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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o( Customs whose decision# in return# is re)iewa le y the Court o( Tax ,ppeals. (- id) A!ternati"e Answers: a) 3o. The owner must ha)e (irst appealed the decision o( the Collector o( Customs# and i( the decision was ad)erse# then the Court o( Tax ,ppeals# consistent with the principle o( exhaustion o( administrati)e remedies. ) 3o. The 4uestion o( seiDure and (or(eiture is (or the Collector o( Customs to determine in the (irst instance and then the Commissioner o( Customs. This is a (ield where the doctrine o( the primary +urisdiction controls. The Collector o( Customs when sittin* in (or(eiture proceedin*s# constitutes a tri unal upon which the law con(ers +urisdiction to hear and determine all 4uestions touchin* the (or(eiture and (urther disposition o( the su +ect matter. The exclusi)e +urisdiction in seiDure and (or(eiture cases )ested in the Collector o( Customs precludes the <TC (rom assumin* co*niDance o)er the matter. The <TC is thus de)oid o( competence to act on the matter. (<epu lic ). CJ- o( /anila# $"7 SC<, $$$) ----------------------------------------------------------

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

Suggested Answer: 3o. The Tari(( and Customs Code authoriDes custom o((icials and a*ents to search any uildin*# except dwellin* houses. 7. Do you thin6 the petition (or certiorari# prohi ition and mandamus (iled y ,pache Corporation will prosper in the Supreme Court2 Discuss. Suggested Answer: 3o. The choice o( remedy assumes want o( authority and +urisdiction. Barrantless searches and seiDures are# howe)er# authoriDed under TCC. Such searches and seiDures are not considered unreasona le within the meanin* o( the constitutional *uarantee. ---------------------------------------------------------1(1. -n )iew o( the un(a)ora le alance o( payment condition and the increasin* ud*et de(icit# the Eresident o( the Ehilippines# upon the recommendation o( 3ational 'conomic and De)elopment ,uthority# issues durin* a recess o( Con*ress an 'xecuti)e Crder imposin* an additional duty on all imports at the rate o( ten ("%F) percent a valorem. The 'xecuti)e Crder also pro)ides that the same shall ta6e e((ect immediately. <icardo San /i*uel# an importer# 4uestions the le*ality o( the 'xecuti)e Crder on the *rounds that only Con*ress has the authority to (ix the rate o( import duties and# in any e)ent# such an 'xecuti)e Crder can ta6e e((ect only thirty (7%) days a(ter promul*ation and the Eresident has no authority to shorten the said period. ,re the o +ections o( /r. San /i*uel tena le2 (!"9# "88" &ar 'xams) Suggested Answer: 3o# the o +ections are not tena le as the 'xecuti)e Crder cannot ta6e e((ect immediately. &ein* an external law and ha)in* the e((ect o( law# the 'xecuti)e Crder cannot ecome e((ecti)e without pu lication# a re4uirement o( due process (Tanada )s. Tu)era# "7@ SC<, $>: 'xecuti)e Crder 3o. $%$). A!ternati"e Answer: Knder the Jlexi le Tari(( Clause (Sec. 9%"# Tari(( and Customs Code)# any order issued y the Eresident thereunder can *enerally ta6e e((ect only thirty (7%) days a(ter its issuance. -n cases howe)er o( an order imposin* additional import duties# the law pro)ides that the same can ta6e e((ect immediately. ---------------------------------------------------------1( . Da*at1da*atan Shippin* Corp. (DSC) rou*ht to the country two ($) non1propelled (orei*n ar*es which DSC chartered (or use in the Ehilippines coastwise trade under a Temporary Certi(icate o( Ehilippine <e*istration# to e returned to the (orei*n owner upon termination o( the charter period ut not eyond "888# pursuant to E.D. >@%# as amended. Kpon their

1(-. , dis*runtled employee o( ,pache Corporation reported to the Commissioner o( Custom that the company is ille*ally importin* electronic e4uipment y way o( unlaw(ul shipside acti)ities there y e)adin* payment o( custom duties and taxes on *oods. ,ccordin*ly# the Commissioner o( Customs# upon the re4uest o( the 'conomic intelli*ence and -n)esti*ation &ureau ('--&)# issued warrants o( seiDure and detention and directed '--& to seiDe the *oods listed in the warrants. ,(ter the seiDure o( the *oods and considerin* the ma*nitude o( the )alue o( the *oods# counsel (or ,pache Corporation (iled a petition with the Supreme Court (or !ertiorari, prohi ition and mandamus to en+oin the Commissioner o( Customs and his a*ents (rom continuin* (urther with the (or(eiture proceedin*s and prayin* that the Commissioner return the con(iscated articles on the *round that the warrants were in )iolation o( the <ules o( the Court and the &ill o( <i*hts. -( you are a newly appointed Solicitor o( the o((ice o( the Solicitor =eneral representin* the commissioner o( Customs# how would you de(end the latter2 =i)e the speci(ic de(enses. (! I# "88$ &ar 'xams) Suggested Answer: ,ppurtenant to its power under the Tari(( and Customs Code to en(orce the pro)isions o( such law# the &ureau o( Customs may conduct searches and seiDures e)en without the ene(it o( a warrant issued y a +ud*e upon pro a le cause. This is historically considered an exemption (rom the constitutional *uarantee a*ainst unreasona le searches and seiDures. $. ,ssumin* that the en(orcement o( the warrant had een extended to the residence o( the Eresident o( ,pache Corporation# is such en(orcement )alid2 'xplain. &Auestion (o. 8, 1992 9ar :xams)

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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arri)al# the ar*es were su +ected to the duty y the &ureau o( Customs. DSC# re(used to pay any customs duty contendin* that the charter or lease o( the ar*es# which will e returned to the (orei*n owner when the charter expires# is not an importation and# there(ore cannot e su +ected to any customs duty. ") -s DSC.s re(usal with or without le*al asis2 (!"I# "88" &ar 'xams) Suggested Answer: DSC.s is without le*al asis. The term importation includes the entry into the country o( any article (rom a (orei*n country. The (act that imported *oods are to e re1exported does not mean that the customs duties may not e imposed# althou*h# in certain cases and su +ect to limitations prescri ed y the Tari(( and Customs Code a draw ac6 may e a)aila le to the taxpayer so as to e a le to o tain the re(und. ,n example o( which are articles which are used in the manu(acture o( products (or export within three (7) years a(ter the importation. $) Cn what is the dutia le )alue o( any imported article ased2 (!"I# "88" &ar 'xams) Suggested Answer: The dutia le )alue o( imported articles is the home consumption cost )alue# i.e.# the cost (air mar6et )alue or price o( the imported articles in wholesale 4uantities in the principal mar6et o( the exportin* country or country o( ori*in# includin* expenses collected (rom importation such as insurance# (rei*ht# pac6a*in*# loadin* and unloadin* char*es ut includin* internal excise taxes in case such )alue is unascertaina le# the Commissioner may also determined the home consumption )alue (rom any relia le and a)aila le data (Sec. $%"# TCC# as amended: Commissioner )s. Court o( Tax ,ppeals# =.<. 3o. >$%@8# $" /ay "8II). ----------------------------------------------------------

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

---------------------------------------------------------1('. , Co.# a Ehilippine corporation# is the owner o( machinery# e4uipment and (ixtures located at its plant in /untinlupa City. The city assessor characteriDed all these properties as real properties su +ect to the real property tax. , Co. appealed the matter to the /untinlupa &oard o( ,ssessment ,ppeals. The &oard ruled in (a)or o( the City. -n accordance with <, ""$A# , Co.# rou*ht a petition (or re)iew e(ore the CT, to appeal the decision o( the City &oard o( ,ssessment ,ppeals. -s the Eetition (or <e)iew proper2 'xplain. (!$# "888 &ar 'xams) Suggested Answer: 3o. The CT, is de)oid o( +urisdiction to entertain appeals (rom the decision o( the City &oard o( ,ssessment ,ppeals. Said decision is instead appeala le to the Central &oard o( ,ssessment ,ppeals# which under the 5ocal =o)ernment Code# has appellate +urisdiction o)er decisions o( the 5ocal &oard o( ,ssessment ,ppeals. &Caltex Phils. In!. v. Central 9oar o$ Assessment Appeals, Ma8 41, 1982). ---------------------------------------------------------1((. , Co.# a Ehilippine corporation# recei)ed an income tax de(iciency assessment (rom the &-< on /ay A# "88A. Cn /ay 7"# "88A# , Co (iled its protest with the &-<. Cn July 7%# "88A# , Co. su mitted to the &-< all rele)ant supportin* documents. The C-< did not (ormally rule on the protest ut on January $A# "88@# , Co. was ser)ed a summons and a copy o( the complaint (or collection o( the tax de(iciency (iled y the &-< with the <TC. Cn Je ruary $%# "88@# , Co. rou*ht a Eetition (or <e)iew e(ore the CT,. The &-< contended that the Eetition is premature since there was no (ormal denial o( the protest o( , Co.# and should there(ore e dismissed. ". $. Has the CT, +urisdiction o)er the case2 Has the <TC +urisdiction o)er the collection case (iled y the &-<2 'xplain. (!9 # "888 &ar 'xams)

RE<E$IES
1(#. , Co# a Ehilippine Corporation (iled its "88A income Tax <eturn on ,pril "A# "88@ showin* a net loss. Cn 3o)em er "%# "88@# it amended its "88A -T< to show more losses. ,(ter a tax in)esti*ation# the &-< disallowed certain deductions claimed y , Co.# puttin* , Co. in a net income position. ,s a result# on ,u*ust A# "888# the &-< issued a de(iciency income assessment a*ainst , Co. , Co. protested the assessment on the *round that it has prescri ed. Decide. (!"# "888 &ar 'xams) Suggested Answer: The ri*ht o( the &-< to assess the tax has not prescri ed. The rule is that internal re)enue taxes shall e assessed within 7 years a(ter the last day prescri ed y law (or the (ilin* o( the return (Sec. $%7# 3-<C). Howe)er# i( the return ori*inally (iled is amended su stantially# the countin* o( the three1year period starts (rom the date the amended return was (iled. &CIR v. Phoenix Assuran!e Co., )t ., 1+ 2CRA /2). There is a su stantial amendment in this case ecause a new return was (iled declarin* more losses# which can only e done either (") in reducin* *ross income or ($) in increasin* the items o( deductions# claimed.

Suggested Answer: ". :es# the CT, has +urisdiction o)er the case ecause this 4uali(ies as an appeal (rom the Commissioner.s decision on disputed assessment. Bhen the Commissioner decided to collect the tax assessed without (irst decidin* on the taxpayer.s protest# the e((ect o( the Commissioner.s action o( (ilin* a +udicial action (or collection is a decision o( denial o( the protest# in which e)ent the taxpayer may (ile an appeal with the CT,. &Repu"li! v. )im Tian Teng 6 2ons, In!. 1, 2CRA /8+5 >a8rit v. Cru? 2eptem"er 2,, 1988) $. The <TC has no +urisdiction o)er the collection case (iled y the &-<. The (ilin* o( an appeal with the CT, has the e((ect o( di)estin* the <TC o( +urisdiction o)er the collection case. ,t the moment the taxpayer appeals the case to the CT, in )iew o( the Commissioner.s (ilin* o( the collection case with the <TC which was considered as a decision o( denial# it *i)es a +usti(ia le asis (or the taxpayer to mo)e (or dismissal in the <TC o( the =o)ernment.s action to collect the tax lia ility under dispute. &Ba"es v. -lo=o, 1/ 2CRA 2385 2an @uan v. Cas%ue? 4 2CRA 92). There is no (inal# executory and demanda le assessment which can e en(orced y the &-< once a timely appeal is (iled.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

---------------------------------------------------------1(). , Co.# a Ehilippine corporation# recei)ed an income tax de(iciency assessment (rom the &-< on 3o)em er $A# "88@. Cn Decem er "%# "88># , Co. (iled its protest with the &-<. Cn /ay $%# "88># the &-< issued a warrant o( distraint to en(orce the assessment. This warrant was ser)ed on , Co. on /ay $A# "88>. -n a letter dated June 9# "88> and recei)ed y , Co. A days later# the C-< (ormally denied , Co..s protest statin* that it constitutes his (inal decision on the matter. Cn July @# "88># , Co. (iled a Eetition (or <e)iew with the CT,. The &-< mo)ed to dismiss the Eetition on the *round that the CT, has no +urisdiction o)er the case. Decide. (!A# "888 &ar 'xams) Suggested Answer: The CT, has +urisdiction o)er the case. The appeala le decision is the one which cate*orically stated that the Commissioner.s action on the disputed assessment is (inal and there(ore# the rec6onin* o( the 7%1day period to appeal was on June 8# "888. The (ilin* o( the petition (or re)iew with the CT, was timely made. The Supreme Court has ruled that the C-< musts cate*orically state that his action on a disputed assessment is (inal; otherwise# the period to appeal will not commence to run. That (inal action can not e implied (rom the mere issuance o( a warrant o( distraint and le)y. &CIR v. ;nion 2hipping Corporation, 18/ 2CRA /+3). ---------------------------------------------------------1(*. Descri e separately the procedures on the le*al remedies under the Tax Code a)aila le to an a**rie)ed taxpayer oth at the administrati)e and +udicial le)els (AF) (!"I# $%%% &ar 'xams) Suggested Answer: The le*al remedies o( an a**rie)ed taxpayer under the Tax Code# oth at the administrati)e and +udicial le)els# may e classi(ied into those (or assessment# collection and re(und. The procedures (or the administrati)e remedies (or assessment are as (ollows: a. . ,(ter receipt o( the Ere1,ssessment 3otice# he must within "A days (rom receipt explain why no additional taxes should e assessed a*ainst him. -( the C-< issues an assessment notice# the taxpayer must administrati)ely protest or dispute the assessment y (ilin* a motion (or reconsideration or rein)esti*ation within 7% days (rom receipt o( the notice o( assessment. (9 th para*raph Sec. $$I 3-<C o( "88>) Bithin @% days (rom (ilin* o( the protest# the taxpayer shall su mit all rele)ant supportin* documents. The +udicial remedies o( an a**rie)ed taxpayer relati)e to an assessment notice are as (ollows: a. Bhere the C-< has not acted on the taxpayer.s protest within a period o( "I% days (rom su mission o( all rele)ant documents# then the taxpayer has a period o( 7% days (rom

the lapse o( said "I% days within which to interpose a petition (or re)iew with the CT,. Should the C-< deny the taxpayer.s protest# then he has a period o( 7% days (rom receipt o( said denial within which to interpose a petition (or re)iew with the CT,. -n oth cases# the taxpayer must apply with the CT, (or the issuance o( an in+uncti)e writ to en+oin the &-< (rom collectin* the disputed tax durin* the pendency o( the proceedin*s. The ad)erse decision o( the CT, is appeala le to the C, y means o( petition (or certiorari within a period o( "A days (rom receipt o( the ad)erse decision# extendi le (or another period o( "A days (or compellin* reasons# ut the extension is not to exceed a total o( 7% days in all. The ad)erse decision o( the C, is appeala le to the SC y means o( a petition (or re)iew on certiorari with a period o( "A days (rom receipt o( the ad)erse decision o( the C,. The employment y the &-< o( any o( the administrati)e remedies (or the collection o( the tax li6e distraint# le)y# etc. may e administrati)ely appealed y the taxpayer to the Commissioner whose decision is appeala le to the CT, under other manner arisin* under the pro)isions o( the 3-<C. The +udicial appeals start with the CT,# and continues in the same manner as shown a o)e. Should the &-< decide to utiliDe its +udicial tax remedies (or collectin* the taxes y means o( an ordinary suit (iled with the re*ular courts (or the collection o( a sum o( money# the taxpayer could oppose the same *oin* up the ladder o( the +udicial processes (rom the /TC (as the case may e) to the <TC# to the C,# thence to the Supreme Court. The remedies o( an a**rie)ed taxpayer on a claim (or re(und is to appeal to the ad)erse decision o( the Commissioner to the CT, in the same manner outlined a o)e. ----------------------------------------------------------

1(+. /r. <eyes# a Jilipino citiDen en*a*ed in the real estate usiness# (iled his "889 income tax return on /arch $%# "88A. Cn Decem er "A# "88A# he le(t the Ehilippines as an immi*rant to +oin his (amily in Canada. ,(ter the in)esti*ation o( said return# the &-< issued a notice o( de(iciency income tax assessment on ,pril "A# "88I. /r. <eyes returned to the Ehilippines as a ali6 ayan on Decem er I# "88I. Jindin* his name to e in the list o( delin4uent taxpayers# he (iled a protest a*ainst the assessment on the *round that he did not recei)e the notice o( assessment and that the assessment had prescri ed. Bill the protest prosper2 'xplain. (!"9# $%%% &ar 'xams) Suggested Answer: 3o. Erescription has not set in ecause the period o( limitations (or the &-< to issue an assessment was suspended durin* the time that /r. <eyes was out o( the Ehilippines or (rom the period Decem er "A# "88A up to Decem er I# "88I (Sec. $$7 in relation to Sec. $%7# oth o( the 3-<C o( "88>)

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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---------------------------------------------------------1(,. Cn June "@# "88># the &-< issued a*ainst the estate o( Jose dela CruD# a notice o( de(iciency estate tax assessment# inclusi)e o( surchar*e# interest and compromise penalty. The 'xecutor o( the 'state (iled a timely protest a*ainst the assessment and re4uested (or wai)er o( the surchar*e# interest and penalty. The protest was denied y the C-< with (inality on Septem er "7# "88>. Conse4uently# the 'xecutor was made to pay the de(iciency assessment on Ccto er "%# "88>. The (ollowin* day# the 'xecutor (iled a Eetition with the CT,# prayin* (or the re(und o( the surchar*e# interest and compromise penalty. The CT, too6 co*niDance o( the case and ordered the C-< to ma6e a re(und. The Commissioner (iled a Eetition (or <e)iew with the C, assailin* the +urisdiction o( the CT, and the Crder to ma6e re(und to the 'state on the *round that no claim (or re(und was (iled with the &-<. (a) -s the stand o( the Commissioner correct2 <eason.; ( ) Bhy is the (ilin* o( an administrati)e claim with the &-< necessary2 (!""# $%%% &ar 'xams) Suggested Answer: (a) :es. There was no claim (or re(und or credit that has een duly (iled with the C-< which is re4uired e(ore a suit or proceedin* can e (iled in any court (Sec. $$8 3-<C o( "88>) The denial o( the claim y the Commissioner is the one which will )est the CT, +urisdiction o)er the re(und case should the taxpayer decide to appeal on time. ( ) The (ilin* o( an administrati)e claim (or re(und with the &-< is necessary in order: ". To a((ord the C-< an opportunity to consider the claim and to ha)e a chance to correct the errors o( su ordinate o((icers &'on?ales v. CTA, et. al. 1+ 2CRA 39) and $. To noti(y the =o)ernment that such taxes ha)e een 4uestioned and the notice should e orne in mind in estimatin* the re)enue a)aila le (or expenditures &9erme=o v. Colle!tor, 'R (o. )*4128, @ul8 29, 19/1) 8N9TE: In a %ase de%ided 45 t1e Su.re2e Court EFda. $e Agustin "s. CIR& Se.t. --1& it was ru!ed t1at t1e CTA 1as Gurisdi%tion to 1ear t1e %ase as it in"o!"es dis.uted assess2ent and not re/und o/ taxes6 ---------------------------------------------------------". $.

TAX LAW REVIEWER


SAINT LOUIS UNIVERSITY BAR OPERATIONS

The tax or any portion thereo( appears to e un+ustly or excessi)ely assessed; or The administration and collection costs in)ol)ed do not +usti(y the collection o( the amount due. (Sec. $%9 (&) 3-<C o( "88>)

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1)1. , domestic corporation (ailed to withhold and remit the tax on income recei)ed (rom Ehilippine sources y a non1resident (orei*n corporation. -n addition to the ci)il penalties pro)ided (or under the Tax Code# a compromise penalty was imposed (or )iolation o( the withholdin* tax pro)isions. /ay the C-< le*ally en(orce the collection o( compromise penalty2 (! A# $%%% &ar 'xams) Suggested Answer: 3o. There is no showin* that the compromise penalty was imposed y the C-< with the a*reement and con(ormity o( the taxpayer. &0on er Me!hani!al :ngineering Corporation v. CTA, /+ 2CRA ///) ---------------------------------------------------------1) . /ay the courts en+oin the collection o( re)enue taxes2 'xplain your answer. (!7 # $%%" &ar 'xams) Suggested Answer: ,s a *eneral rule# the courts ha)e no authority to en+oin the collection o( re)enue taxes. (Sec. $"I 3-<C). Howe)er# the CT, is empowered to en+oin the collection o( taxes throu*h administrati)e remedies when collection could +eopardiDe the interest o( the *o)ernment or taxpayer. (Sec. "" <, ""$A) ---------------------------------------------------------1)#. , corporation (iles its income tax return on a calendar year asis. Jor the (irst 4uarter o( "887# it paid on 7% /ay "887 its 4uarterly income tax in the amount o( E7.% million. Cn $% ,u*ust "887# it paid the second 4uarterly income tax o( E%.A million. The third 4uarter resulted in net loss# and no tax was paid. Jro the (ourth and (inal return (or "887# the company reported a net loss (or the year# and the taxpayer indicated in the income tax return that it opted to claim a re(und o( the 4uarterly income tax payments. Cn "% January "889# the corporation (iled with the &ureau o( -nternal <e)enue a written claim (or the re(und o( E7.A million. &-< (iled to act on the claim (or re(und; hence# on %$ march "88@# the corporation (iled (or a petition (or re)iew the Court o( Tax ,ppeals on its claim (or re(und o( the o)er payment o( its "887 4uarterly income tax. &-<# in its answer to petition# alle*ed that the claim (or re(und was (iled eyond the re*lementary period. Did the claim (or re(und prescri e2 (!"A# "88> &ar 'xams)

1)-. Knder what conditions may the Commissioner o( -nternal <e)enue e authoriDed to: a) Compromise the payment o( any internal re)enue tax2 ) , ate or cancel a tax lia ility2 (!"@# $%%% &ar 'xams) Suggested Answer: (a) The C-< may e authoriDed to compromise the payment o( any internal re)enue tax where: ". , reasona le dou t as to the )alidity o( the claim a*ainst the taxpayer exists; or $. The (inancial position o( the taxpayer demonstrates a clear ina ility to pay the assessed tax. ( ) The C-< may a ate or cancel a tax lia ility when:

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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Suggested Answer: The claim (or re(und has prescri ed. The countin* o( two ? year prescripti)e period (or (ilin* a claim (or re(und is counted not (rom the date when the 4uarterly income taxes were paid ut on the date when the (inal ad+ustments return or annual income tax return was (iled (C-< ). T/G Sales -nc.# =.<. 3o. I7>7@# January "A# "887; C-< ). Ehilam 5i(e -nsurance Co.# -nc.# =.<. 3o. "%A$%I# /ay $A# "88A). -t is o )ious that the annual income tax return was (iled e(ore January "%# "889 ecause the written claim (or re(und was (iled with &-< on January "%# "889. Since the two year prescripti)e period is not only a limitation o( action (or rin*in* the case to the +udicial sta*e# the petition (or re)iew (iled with the CT, on /arch %$# "88@ is eyond the re*lementary period. ---------------------------------------------------------1)'. ,n in(ormation was (iled in court (or will (ull non ? payment o( income tax the assessment o( which has ecome (inal. The accused# throu*h counsel# presented a motion that he e allowed to compromise his tax lia ility su +ect o( the in(ormation. The prosecutor indicated his con(ormity to the motion. -s this procedure correct2 (!"A# "88I &ar 'xams) Suggested Answer: 3o. Criminal )iolations# i( already (iled in court# may not e compromised (Sec. $9(&)# 3-<C). Jurthermore# the payment o( the tax due a(ter apprehension shall not constitute a )alid de(ense in any prosecution (or )iolation o( any pro)isions o( the Tax Code (Sec. $9>(a)# 3-<C). Jinally# there is a le*al o((icer o( the &-< to whom the conduct o( criminal actions are lod*e y the Tax Code. A!ternati"e answer: 3o. -( the compromised re(erred to is the ci)il aspect# the procedure (ollowed is not correct. Compromise (or the payment o( any internal re)enue tax shall e made only y the Commission o( -nternal <e)enue or in proper case the ')aluation &oard o( the &-< (Sec. $%9# 3-<C). ,pplyin* the law to the case at ar# compromise settlement can only e a((ected y lea)e o( Court. ---------------------------------------------------------1)(. ay the Commissioner o( -nternal <e)enue compromise the payment o( withholdin* tax (tax deducted and withheld at source) where the (inancial position o( the taxpayer demonstrates a clear ina ility to pay the assessed tax2 (!"@# "88I &ar 'xams) Suggested Answer: 3o. , taxpayer who is constituted as withholdin* a*ent who has deducted and withheld at source the tax on the income payment made y him holds the taxes as trust (und (or the *o)ernment (Sec. AA(D) and is o li*ated to remit them to &-<. The su se4uent ina ility o( the withholdin* a*ent to payHremit the tax withheld is a not a *round (or compromise ecause the withholdin* tax is not a tax upon withholdin* a*ent ut it is only a procedure (or collection o( a tax.

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SAINT LOUIS UNIVERSITY BAR OPERATIONS

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1)). s the &-< authoriDed to issue a warrant o( *arnishment a*ainst the an6 account o( a taxpayer despite the pendency o( his protest a*ainst the assessment with the &-< or appeal with the Court o( Tax ,ppeals2 8H1+&1,,+ @ar Exa2s6 Suggested Answer: The &-< is authoriDed to issue a warrant o( *arnishment a*ainst the an6 account o( a taxpayer despite pendency o( protest (:a es ). Jlo+o# "A SC<, $>8). 3owhere in the Tax Code its the Commissioner re4uired to rule (irst on the protest e(ore he can institute collection proceedin*s on the tax assessed. The le*islati)e policy is to *i)e the Commissioner much latitude in the speedy and prompt collection o( taxes ecause it is in the taxation that the *o)ernment depends to o tain the means to carry on its operations (<epu lic ). Tim Tian Ten* Sons# -nc.# "@ SC<, AI9). A!ternati"e Answer: 3o# ecause the assessment has not yet ecome (inal# executory and demanda le. The asic consideration in the collection o( taxes is whether the assessment is (inal and appeal a le or the decision o( the Commissioner is (inal.# executory and demanda le# the &-< has the le*al asis to collect the tax lia ility y either administrati)e or +udicial action. The Commissioner is not authoriDed to issue the warrant o( *arnishment durin* the pendency o( appeal with the Court o( Tax ,ppeal ecause the ,ssessment is not yet (inal and unappeala le. ----------------------------------------------------------

1)*. & Corporation# a domestic corporation en*a*ed in (ood processin* and other allied acti)ities# recei)ed a letter (rom the &-< assessin* it (or delin4uency income taxes. CJ& (iled a letter o( protest. Cne month a(ter# a warrant o( distraint and le)y was ser)ed on CJ& Corporation. -( you were the lawyer en*a*ed y CJ& Corporation to contest the ,ssessment made y the &-<# what steps will you ta6e to protect your client2 (!"8# "88I &ar 'xams) Suggested Answer: - shall immediately (ile a motion (or reconsideration o( the issuance o( the warrant o( distraint and le)y and see6 (rom the &-< Commissioner a denial o( the protest in clear and e4ui)ocal lan*ua*e. This is so ecause the issuance o( a warrant o( distraint and le)y is not considered as denial y the &-< o( the protest (iled y CJ& Corporation (C-< ). Knion shippin* Corp.# "IA SC<, A9>). Bithin thirty (7%) days (rom receipt o( such denial in clear and une4ui)ocal lan*ua*e# - shall then (ile a petition (or re)iew with Court o( Tax ,ppeals. A!ternati"e Answer:

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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Bithin thirty (7%) days (rom receipt o( the warrant o( distraint and le)y# - shall (ile a petition (or re)iew with the court o( Tax ,ppeals with an application (or issuance o( a writ o( preliminary in+unction to en+oin the &-< (rom en(orcin* the warrant. This is the action - shall ta6e ecause - shall consider the issuance o( the warrant as a (inal decision o( the Commissioner o( -nternal <e)enue which could e the su +ect o( appeal to the Court o( Tax ,ppeal (:a es ). Jlo+o# "A SC<, $>I). The CT, may# howe)er# remand the case to the &-< and re4uire the Commissioner to speci(ically rule to the protest. The decision o( the Commissioner# i( ad)erse to my client# would then constitute an appeal a le decision. ---------------------------------------------------------1)+. -s assessment necessary e(ore a tax payer may e prosecuted (ro will(ully attemptin* in any manner to e)ade or de(eat any tax imposed y the -nternal <e)enue code2 (!$%# "88I &ar 'xams) Suggested Answer: 3o. ,ssessment is not necessary e(ore a taxpayer may e prosecuted i( there is prima (acie showin* o( a will(ul attempt to e)ade taxes as in the taxpayer.s (ailure to declare a speci(ic item o( taxa le income in his income tax return (Kn*a ). Cusl 8> SC<, I>>). Cn the contrary# i( the taxes alle*ed to ha)e een e)aded is computed ased on reports appro)ed y the &-< there is a presumption o( re*ularity o( the pre)ious payment o( the taxes# so that unless and until the &-< has made (inal determination o( what is supposed to e the correct taxes# the taxpayer should not e placed in the cruci le o( criminal prosecution (C-< ). Jortune To acco Corp.#=< 3o. ""87$$# June 9# "88@). ---------------------------------------------------------1),. ".) Compare the taxpayer.s remedies under the 3ational -nternal <e)enue Code and the Tari(( and Customs Code. Suggested Answer: The taxpayer.s remedies under the 3ational internal <e)enue Code may e cate*oriDed into remedies e(ore payment and remedies a(ter payment. The remedy e(ore payment consists o( administrati)e remedy which is the (ilin* o( protest within 7% days (rom receipt o( assessment# and +udicial remedy which is the appeal o( the ad)erse decision o( the Commissioner on the protest with the court o( Tax ,ppeals# therea(ter to the Court o( ,ppeals and (inally with the Supreme Court. The remedy a(ter payment is a)ailed o( y payin* the assessed tax within 7% days (rom receipt o( assessment and the (ilin* o( a claim (or re(und or tax credit o( these taxes on *rounds that they are erroneously paid within two years (rom date o( payment. -( there is a denial o( the claim# appeal to the CT, shall e made within thirty days (rom denial ut within two years (rom date o( payment. -( the Commissioner (ails to act on the

claim (or re(und or tax credit and the two year period is a out to expire# the taxpayer should consider the continuous inaction o( the Commissioner as a denial and ele)ate the case to the CT, e(ore the expiration o( the two year period. Knder the Tari(( and Customs Code# taxpayer.s remedies arise only a(ter payment o( duties. The administrati)e remedies consist o( (ilin* a claim (or re(und# which may ta6e the (orm o( a atement or draw ac6. The taxpayer can also (ile a protest within "A days (rom payment i( he disa*rees with the rulin* or decision o( the Collector o( Customs re*ardin* the le*ality or correctness o( the assessment o( customs duties. -( the decision o( the Collector is ad)erse to the taxpayer# he can noti(y the Collector within "A days (rom receipt o( said decision o( his desire to ha)e his case re)iewed y the Commissioner. The decision o( the collector on the taxpayer.s protest# i( ad)erse to the =o)ernment# is automatically ele)ated to the Commissioner (or re)iew; and i( such decision is a((irmed y the Commissioner# the same shall e automatically ele)ated to and (inally re)iewed y the Secretary o( Jinance. <esort to +udicial relie( can e had y the taxpayer y appealin* the decision o( the Commissioner or o( the Secretary o( Jinance ((or cases su +ect to automatic re)iew% within 7% days (rom the promul*ation o( the ad)erse decision to the CT,. $.) Discuss rie(ly the remedies o( an importer durin* the pendency o( seiDure proceedin*s. (!"9# "88@ &ar 'xams) Suggested Answer: Durin* the pendency o( seiDure proceedin*s the importer may secure the release o( the imported property (or the le*itimate used y postin* a ond in an amount to e (ixed y the Collector# conditioned (or the payment o( the appraised )alue o( the article andH or any (ine# expenses and costs which may e ad+ud*ed in the case; pro)ided# that the articles the importation o( which is prohi ited y law shall not e released under ond. The importer may also o((er to pay to the collector a (ine imposed y him upon the property to secure its release or in case o( (or(eiture# the importer shall o((er to pay (or the domestic mar6et )alue o( the seiDed article# which o((er su +ect to the appro)al o( the Commissioner may e accepted y the Collector in settlement o( the seiDure case# except when there is (raud. Kpon payment o( the (ine or domestic mar6et )alue# the property shall e (orthwith released and all lia ilities which may or mi*ht attach to the property y )irtue o( the o((ense which was the occasion o( the seiDure and all lia ility which mi*ht ha)e een incurred under any ond *i)en y the importer in respect to such property shall thereupon e deemed to e dischar*ed. ---------------------------------------------------------1*-. A6 Knder Section $A$7 o( the Tari(( and Customs Code# the duty o( )eri(yin* the correct wei*ht o( a car*o shipment is imposed upon the )essel.s master# owner or employee. -( a discrepancy etween the actual *ross wei*ht and declared *ross wei*ht o( the manis(ested car*o exceeds $%F and the Collector shall e o( the opinion that such discrepancy was due to the carelessness o( incompetency o( the master o( pilot in command# owner or employee o( the )essel# a (ine not more than "AF o( the )alue o( the article may e imposed upon the importin* )essel.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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,&C Corporation.s )essel was (ound# a(ter appropriate administrati)e proceedin*s# to ha)e )iolated the said pro)ision (ar exceedin* than $%F statutory limitation. The Collector o( Customs imposed a (ine o( E$$#@%%.%% (representin* "AF o( the )alue o( the discrepancy) which was a((irmed y the Commissioner o( Customs. Cn appeal y ,&C Corporation# the Court o( Tax ,ppeals (ound the (ine o( E$$#@%%.%% harsh and unreasona le (or a (irst o((ense and reduced the same to EA#%%%.%%. The Commissioner o( Customs 4uestions the scope o( authority o( the Court o( Tax ,ppeals in the determination o( the (ine imposa le under Section $A$7 o( the Tari(( and Customs Code. Bhose +ud*ment should pre)ail under the circumstances o( the case2 'xplain (ully. (!"7# "88$ &ar 'xams) Suggested Answer: The +ud*ment o( the Court o( Tax ,ppeals should pre)ail. The CT, has exclusi)e appellate +urisdiction o)er decision o( the Commissioner o( Customs in cases in)ol)in* the imposition o( (ines# (or(eitures or other penalties. @6 ,ntonio CruD was appointed y the <e*ional Trial Court as ,dministrator in the testate proceedin*s (or the settlement o( the estate o( his deceased (ather. Cn "$ Je ruary "8I># the Commissioner o( -nternal <e)enue issued a de(iciency estate tax assessment (or the estate in 4uestion in the amount o( E$#I"@#A"9.@%. The notice o( de(iciency assessment was recei)ed y the ,dministrator on "8 Je ruary "8I>. in his letter to the Commissioner# dated $" Je ruary "8I># which was recei)ed y the latter.s o((ice two ($) days later# the ,dministrator re4uested (or a reconsideration o( the assessment on the *round that the same is contrary to the law and is not supported y su((icient e)idence. He also re4uested (or a period o( (i(teen ("A) days within which to su mit the estate.s position paper. Cn 9 ,u*ust "8II# not ha)in* recei)ed the promise position paper# the Commissioner (iled the Court a motion (or allowance o( claim and (or an order o( payment o( estate taxes# prayin* therein that the administrator e directed to pay the &-< the a(orementioned de(iciency tax. The administrator opposed the motion alle*in* that y reasons o( the pendency o( his re4uest (or reconsideration# the de(iciency assessment has not ecome (inal and executory and# there(ore# the a sence o( a decision on the disputed assessment is a ar a*ainst collection o( taxes. He (urther ar*ued that it is the Court o( Tax ,ppeals# and not the <e*ional Trial Court# which has exclusi)e +urisdiction o)er the claim. 7) <esol)e the motion and issues raised. (!"$# "88" &ar 'xams)

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not ein* su stantiated# to stop the runnin* o( the 7%1day period within which the assessment may e disputed (Dayrit )s. CruD# =.<. 3o. 788"8# $@ Septem er "8II). The (ailure o( the taxpayer to su mit the promised position paper within the said 7%1day period had the e((ect o( renderin* the assessment (inal and executory. -n addition# the pendency o( a decision on a disputed assessment does not ar the collection o( the 3-<C taxes# and no in+unction may e issued y any court (except y the Court o( Tax ,ppeals as an incident to a timely petition (or re)iew). -n the a sence o( a petition re)iew with the Court o( Tax ,ppeals which may e rou*ht y a taxpayer within thirty (7%) days (rom the receipt o( the (inal decision o( the Commissioner# the Court o( Tax ,ppeals has no +urisdiction to ta6e co*niDance thereo( (See Sec. ""# <, ""$A). Eremises considered# the action ta6en y the Commissioner with the <e*ional Trial Court was appropriate and in accordance with law. A!ternati"e Answer: Cnce a re4uest (or reconsideration is made y the taxpayer on an assessment o( the &-< within 7% days (rom the receipt thereo(# the Commissioner is ound to ma6e a decision thereon. That decision is the one appeala le to the Court o( Tax ,ppeals. &ut i( the taxpayer does not appeal within the 7% day period# the assessment ecomes (inal and executory and demanda le. The implication o( this new collect the tax as lon* as the taxpayer has still the ri*ht to appeal (rom the Commissioner.s action. ---------------------------------------------------------1*1. Corporation G declared cash di)idends in (a)or o( its non1resident stoc6holders in the Knited States (rom which amount# the tax on di)idend income was withheld. Knder the <E1KS Tax Treaty# deductions allowed as tax on di)idends earned at source were (ixed at lower rates *i)in* rise to o)erpayment o( the tax on di)idends paid to the non1resident KS stoc6holders (representin* the di((erence etween the amount o( withholdin* tax paid and the amount supposed to ha)e een withheld under the mentioned tax co)enant). Corporation G (iled a claim (or re(und o( said o)erpayment with the Commissioner o( -nternal <e)enue within the prescri ed period which howe)er# remained unacted upon# and e(ore the expiration o( the two ($) year re*lementary period# it (iled a +udicial claim (or re(und with the Court o( Tax ,ppeals. <espondent Commissioner o( -nternal <e)enue ar*ues that Corporation G is not the real party in interest to prosecute a claim (or re(und o( the o)erpaid taxes o( the non1 resident KS stoc6holders# who are the real parties in interest. &ut neither could it maintain an action (or re(und in a representati)e capacity ha)in* (ailed to show proo( o( authoriDation. Bill Corporation G.s case prosper2 'xplain. (!"$# "88$ &ar 'xams) Suggested Answer: D :es. , su sidiary# while not the real party in interest# could prosecute a claim o( re(und in ehal( o( its non1resident

Suggested Answer: ')idently# the re4uest (or reconsideration did not express or speci(y the *rounds there(or. , re4uest (or reconsideration in the tenor stated in the pro lem is insu((icient#

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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stoc6holders y )irtue o( its ein* the withholdin* a*ent (or the *o)ernment in respect o( the cash di)idends it declared (Comm. )s. Bander Ehils.). A!ternati"e Answers: 3o. The tax is due on the non1resident stoc6holders. The rule is that the re(und may e claimed y the taxpayer on whom the tax is imposed and who e((ecti)ely paid the tax. ---------------------------------------------------------1* . ". Bhat are the le*al remedies o( an a**rie)ed tax payer oth at the administrati)e and +udicial le)els2 Descri e separately the procedures. (!$# "88$ &ar 'xams) Suggested Answer: a. The administrati)9e and +udicial remedies are such as may e pro)ided (or in law imposin* the tax. ,n expression o( such remedies in the law should then e deemed exclusi)e y the taxpayer. Bhen the law imposin* the tax is silent on remedies# the laws and rules o( procedure o( *eneral application shall then *o)ern. . Knder the 3-<C# an a**rie)ed taxpayer may either (") dispute an assessment within thirty (7%) days (rom receipt thereo( y (ilin* with the Commission o( -nternal <e)enue a re4uest (or reconsideration o( rein)esti*ation# or ($) pay the assessment within the thirty days then (ile a written claim with the Commissioner o( -nternal <e)enue re(und within two years (rom (ull and (inal payment. Kpon an ad)erse decision o( the Commissioner and within thirty days (rom receipt o( notice o( denial# an appeal may e (iled with the Court o( Tax ,ppeals. Howe)er# with respect to claims (or re(unds# an appeal must also e (iled within two years (rom the date o( (ull and (inal payment. Jrom the decision o( the Court o( Tax ,ppeals# an appeal (or petition (or re)iew y certiorari may e ta6en to the Court o( ,ppeals and then to the Supreme Court in appropriate cases. $. Distin*uish etween a taxpayer.s remedies in connection with his tax assessment andHor demand and his claim (or re(und o( taxes alle*ed to ha)e een erroneously or ille*ally collected. Suggested Answer: , tax assessment ecomes (inal unless it is disputed or contested within 7% days (rom receipt thereo( y the taxpayer. -( the action ta6en y the Commissioner on the re4uest (or reconsideration is unaccepta le to the taxpayer# the latter must then appeal# y way o( Eetition (or <e)iew to the court o( tax appeals within thirty days (rom receipt o( the decision o( the Commissioner o( -nternal <e)enue. The taxpayer may also opt to pay the tax e(ore the (inality o( the assessment (e.*.# within 7% days (rom receipt o( the assessment) and then (ile within two years a written claim (or the re(und o( tax. , denial y a the Commissioner o( a claim (or re(und must e appealed to the CT, within thirty days (rom receipt o( notice o( denial and within two years (rom the day o( (ull and (inal payment. Continued inaction y the Commissioner on claims (or re(und may thus e ta6en as a denial appeala le to the Court o( Tax ,ppeals# in order permit the appeal to e considered or ha)in* een made within the two1year mandatory period.

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7. Bhat are the re4uisites e(ore a taxpayer.s re4uest (or rein)esti*ation may e *ranted y the &-<2 Discuss rie(ly. Suggested Answer: , re4uest (or rein)esti*ation re(ers to a plea (or ree)aluation o( an assessment on the asis o( newly disco)ered e)idence or additional the taxpayer intends to present in the rein)esti*ation. A!ternati"e Answer: He must (ile a written protest statin* his *rounds there(ore so that his protest could e *ranted. 9. i( the re4uest (or rein)esti*ation is denied# is it possi le or ad)isa le to (ile a petition (or re)iew with any court or a*ency as a last resort. Suggested Answer: , denial o( a re4uest (or rein)esti*ation on assessment parta6es the nature o( a decision i( made y the Commissioner. -n this a case# an with the CT, within thirty days (rom receipt. A!ternati"e Answer: Cn the assumption that the denial y the &-< was not made y the Commissioner himsel( ut y the <e*ional C((icer# (or instance# or that the re4uest (or rein)esti*ation is not on an assessment as yet# then it may not e necessarily constitute a decision on a disputed assessment (rom which an appeal may e made to the Court o( Tax ,ppeals. ---------------------------------------------------------1*#. GC'5 Corporation (iled its 4uarterly income tax return (or the (irst 4uarter o( "8IA and paid an income tax o( EA%%#%%%.%% on /ay "A# "8IA. in the su se4uent 4uarters# GC'5 su((ered losses o( E"#%%%#%%%.%% in its annual income tax return. ,(ter (ailin* to *et re(und# GC'5 (iled on /arch "# "8II a case with the Court o( Tax ,ppeals to reco)er the EA%%#%%%.%% in taxes paid on /ay "A# "8IA. -s the action to reco)er the taxes (iled timely2 (!"># "889 &ar 'xams) Suggested Answer: The action (or the re(und was (iled in the Court o( Tax ,ppeals on time# in the case o( Commissioner ). T/G Sales# -nc. $%A SC<, "I9# which is similar to this case# the Supreme Court ruled that in the case o( o)erpaid 4uarterly corporate income tax# the two1year period (or (ilin* claims (or re(und in the &-< as well as in the institution o( as action (or re(und in the CT,# the two1year prescripti)e period (or tax re(unds (Sec. $7%# Tax Code) is counted (rom the (ilin* o( the (inal ad+ustment return under Sec. @> o( Tax Code# and not (rom the (ilin* o( the 4uarterly return and payment o( the 4uarterly tax. The CT, action on /arch "# "8II was clearly within the re*lementary two1year period (rom the (ilin* o( the (inal ad+ustment return o( the corporation on ,pril "A# "8I@.

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

+---------------------------------------------------------1*'. A6 /r. Dante <aymundo retired (rom the *o)ernment ser)ice as Director o( 5and Transportation on January @# "8IA. Kpon retirement# /r. <aymundo recei)ed# amon* other ene(its# his terminal lea)e pay (or which the &-< withheld the sum o( EA@#%%%.%% a wee6 (ollowin* the date o( his retirement. Cn Ccto er "># "88"# (ollowin* the decision o( the Supreme Court that the money )alues o( the accumulated lea)e creditsHterminal pay is not su +ect to withholdin* tax# /r. <aymundo (iled a claim (or re(und o( EA@#%%%.%% with the Commissioner o( -nternal <e)enue. ".) -s /r. <aymundo within his ri*hts in claimin* a re(und o( taxes withheld on his terminal lea)e (ollowin* the Supreme Court decision2 (!"# "88$ &ar 'xams) Suggested Answer: 3o. Knder Section $7% o( the 3-<C# a suit (or the reco)ery o( tax erroneously or ille*ally collected cannot e (iled a(ter the expiration o( two years (rom the date o( payment o( tax re*ardless o( any super)enin* cause to claim (or re(und has already prescri ed. $. -( the retiree is within his le*al ri*hts in claimin* re(und o( the taxes withheld# will the &-< automatically *rant his claim2 'xplain your answer. (!"# "88$ &ar 'xams) Suggested Answer: 3o. &ecause he must (ile a written claim. 7. ,ssumin* that the &-< denies the claim (or re(und# what could e the possi le reason or statutory asis (or such a denial2 Suggested Answer: The possi le reason (or a denial would e that the written claim has already prescri ed or that the terminal pay lea)e is not excluded (rom income tax. Sec. $7%# 3-<C (supra). 9. Discuss the theory o( super)enin* e)ent as it applies to claims (or re(und o( erroneouslyHille*ally collected taxes. Can the retiree claim a re(und under this theory2 'xplain. Suggested Answer: The theory o( super)enin* e)ent expresses that an e)ent which is eyond the control o( the parties would allow the reco)ery o( erroneously or ille*ally collected taxes pro)ided the proceedin* (or such reco)ery is made within the prescripti)e period (rom the occurrence o( such e)ent. The theory o( super)enin* e)ent has een a ro*ated y Section $7% o( the 3-<C. @6 ,pple Computer Corp. (,CC) is a (orei*n corporation doin* usiness in the Ehilippines throu*h a local ranch located at /a6ati# /etro /anila. -n "8IA# the local ranch applied with the Central &an6 (or authority to remit to ,CC ranch pro(its amountin* EI#%%%#%%%.%%. ,(ter payin* the "AF ranch remittance tax o( E"#$%%#%%%.%%# the ranch o((ice remitted to ,CC the alance o( @#I%%#%%%.%%. -n January "8I@#

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the ranch o((ice was ad)ised y its le*al counsel that it o)erpaid the ranch remittance tax since the asis o( the computation thereo( should e the amount actually remitted and not the amount applied (or. ,ccordin*ly# the ranch o((ice applied (or a re(und in the amount o( E"I%#%%%.%%. -( you were the Commissioner o( -nternal <e)enue# would you *rant the claim (or re(und2 (!7# "88" &ar 'xams) Suggested Answer: -( - were the Commissioner o( -nternal <e)enue# would allow the claim (or re(und. The remittance tax should e computed on the amount actually remitted ( /aru ent Corporation )s. Commissioner# =.<. 3o. >@A>7# "9 Septem er "8I8). -n the re(und o( taxes# the claim there(or can e (iled within two ($) years (rom the time o( payment so lon* as the tax payment was made e(ore an assessment y the Commissioner has ecome (inal (Sec. $7%# 3-<C). 8N9TE: :nder t1e 1,,* NIRC& t1e 4asis /or t1e 4ran%1 .ro/it re2ittan%e tax is t1e a2ount o/ 4ran%1 .ro/it a..!ied /or or ear2arIed /or re2ittan%e. Jen%e t1e a4o"e suggested answer is N9 L9NGER APPLICA@LE6 ---------------------------------------------------------1*(. 16 Jitness# -nc. is a domestic corporation en*a*ed in the manu(acture and sale o( nutritional products. -t pays royalties to its (orei*n licensor. ,(ter in)esti*ation# the &-< on Decem er "># "8>9# sent a notice o( assessment to Jitness# -nc. (or alle*edly (ailin* to remit withholdin* tax at source (or the (ourth 4uarter o( "8>7 on its royalties. -t demanded payment o( E7#%%%.%%%.%%. The notice was recei)ed y Jitness#-nc on Decem er "8# "8>9. Cn Jeruary I# "8>A# Jitness# -nc. throu*h its counsel# protested the assessment and re4uested its cancellation or withdrawal on the *round that it lac6ed (actual and le*al ases. Cn Decem er "%# "8>8# the Commissioner o( the &-< rendered a decision reducin* the assessment to E"#A%%#%%%.%%. Jitness# -nc. was not satis(ied and on January "I# "8I%# it (iled a petition (or re)iew o( the decision in the CT, to en+oin the en(orcement o( the assessment. Cn Je ruary ># "8I%# the &-< issued a warrant o( distraint a*ainst Jitness# -nc. The CT, en+oined the collection o( the de(iciency taxes y )irtue o( the warrant o( distraint. -t was ar*ued y Jitness# -nc. that the ri*ht o( the &-< to collect its alle*ed de(iciency taxes had already prescri ed. <ule on the ar*ument. (!"># "887 &ar 'xams) Suggested Answer: The warrant o( distraint was ser)ed on the taxpayer within the prescri ed period (then A years# now three (7) years). -n Commissioner ). Byeth Suaco ($%$ SC<, "$A)# the court ruled that prescripti)e period pro)ided y the law to ma6e collection y distraint yHor le)y or y a proceedin* in court is interrupted once a tax payer protests the assessment and re4uests (or its cancellation. Thus# when the taxpayer protested the assessment on I Je ruary "8>A# the prescripti)e period to collect was interrupted and resumed on "% Decem er "8>8. Bhen the Commissioner issued the warrant o( distraint on >

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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Je ruary "8I% it was well within the (i)e1year (now 7 years) prescripti)e period to collect. A!ternati"e Answers: a) The &ureau o( -nternal <e)enue (&-<) shall assess internal re)enue taxes within three (7) years a(ter the last day prescri ed y law (or the (illin* o( return# and no proceedin* in court without assessment (or the collection o( such taxes shall e e*un a(ter the expiration o( such period (Section $%7 o( the 3ational -nternal <e)enue Code R3-<CS. Howe)er# this three (7) ?year prescripti)e period shall e suspended when the taxpayer re4uests (or a rein)esti*ation and which is *ranted y the Commission (Section $$9 o( 3-<C). -n case as assessment was made# the tax may e collected within three (7) years (rom the date o( assessment (Collector o( -nternal <e)enue ). Eineda# $ SC<, 9%"; Kmali# <oman ,# <e)iewer in Taxation# "8IA# pp. 9I@19I>; 0itu*# Jose C..Compendium o( Tax 5aw and Jurisprudence# $nd <e).# 'd.# "8I8# p. $AA). -( the taxpayer as6s (or a rein)esti*ation o( the assessment and such rein)esti*ation is made# and on the asis o( which the &-< ma6es another assessment# the three (7)1year period (ort he collection is to e counted (rom the last assessment (<ep. ). 5opeD# > SC<, A@@; <ep. ). ,ce edo# $$ SC<, "7A@; Kmali# <oman ,.# <e)iewer in Taxation# "8IA# pp. 9I@1I>; 0itu*# Jose C.# Compendium o( Tax 5aw and Jurisprudence# $ nd <e).# 'd.# "8I8# p $AA). -n the case at ar# the runnin* o( the three (7)1year prescripti)e period (or the &-< to collect taxes started to run only on "% Decem er "8>8# when a (inal assessment was made y the &-< reducin* the tax due to Cne /illion Ji)e Hundred Thousand Eesos (E"#A%%#%%%.%%). The collection was e((ected on > Je ruary "8I%# y issuin* a warrant distraint a*ainst Jitness# -nc. Hence# the action o( the &-< to collect the de(iciency taxes was clearly within the three (7)1year prescripti)e period. ) The ri*ht o( the &-< to collect the de(iciency taxes has not prescri ed# as the prescripti)e period is rec6oned (rom the date o( the reduced assessment# which is Decem er "%# "8>8. The &-< has three (7) years (rom said date to collect. The reduced assessment is in the nature o( a compromise assessment# the (irst assessment recei)ed y Jitness# -nc. on Decem er "8# "8>9# and protested on Je ruary I# "8>A# ha)in* already ecome (inal and indin* on Jitness. ,pplyin* the present pro)isions o( the 3-<C# Jitness should ha)e protested the assessment within thirty (7%) days (rom receipt o( the same. Jailin* to do so# the assessment ecame (inal and was presuma ly merely compromised. The date o( such compromise assessment should then e the asis (or computin* the prescripti)e period o( three (7) years. 6 Cn Septem er "8# "8>7# the &-< sent a notice o( assessment to G to pay E7%%#%%%.%% as (orest char*es (or the year "8>%1>7. G made partial payment o( E"%%#%%%.%% on Septem er $I# "8>7. G died in 3o)em er "8>>. Cn July $8# "8>8# the &-< (iled in the Testate 'state Eroceedin*s o( G# the claim (or E$%%#%%%.%% the unpaid (orest char*es le(t y G# the

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administrator o( the estate opposed the claim on the *round o( prescription. Decide. (!"I# "887 &ar 'xams) Suggested Answer: Bhere assessment was made# the tax may e collected within (i)e (A) years (now 7 years) (rom the date o( assessment (Collection o( -nternal <e)enue ). Eineda# $ SC<, 9%"; Kmali# <oman ,.# <e)iewer in Taxation# "8IA# pp. 9I@1I>; 0itu*# Jose C.# Compendium o( Tax 5aw and Jurisprudence# $ nd <e).# 'd.# "8I@# p $AA). -n the case at ar# G on the asis o( the notice o( assessment# )oluntarily made a partial payment to the &-< in the amount o( Cne Hundred Thousand Eesos (E"%%#%%%.%%). Howe)er# it too6 the &-< almost more than (i)e (A) now three (7) year period (or the collection o( taxes. Hence# the claim (iled y the &-< a*ainst the 'state o( G (or the payment o( Two Hundred Thousand Eesos (E$%%#%%%.%%) has prescri ed. A!ternati"e Answers: a) The claim has prescri ed as the &-< has only three (7) years (rom the date o( the assessment to collect. ) Taxes are money claims that must e (iled with the pro ate court within the period pro)ided (or in the <ules o( Court (Sections " and $# <ules I@). -n case o( Domin*o ). =arlitos (I SC<, 997)# the court ruled that the claim shall e arred i( (iled eyond the prescri ed period +ust li6e any other money claims. &ut the rulin* in =arlitos was superseded y 0era ) JernandeD which ruled that estate taxes are paya le e)en i( presented eyond the period in the statute o( non1claims in the <ules o( Court. ---------------------------------------------------------1*-. ". /ay the Court o( Tax ,ppeals issue an in+unction to en+oin the collection o( taxes y the &ureau o( -nternal re)enue2 'xplain. Suggested Answer: :es. Bhen a decision o( the Commissioner on a tax protest is appealed to the CT, pursuant to Sec. "" o( <.,. 3o. ""$A (law creatin* the CT,) in relation to Sec. $$8 o( the 3-<C# such appeal does not suspend the payment# le)y# distraint andH or sale o( any o( the taxpayer.s property (or the satis(action o( his tax lia ility. Howe)er# when in the opinion o( the CT, the collection o( the tax may +eopardiDe the interest o( the =o)ernment andH or the taxpayer# the court at any sta*e o( the proceedin*s may suspend or restrain the collection o( the tax and re4uire the taxpayer either to deposit the amount claimed or to (ile a surety ond (or not more than dou le the amount with the Court. $. /ay the tax lia ility o( a taxpayer e compromised durin* the pendency o( an appeal2 'xplain. (!"$# "88@ &ar 'xams) Suggested Answer: :es. Durin* the pendency o( the appeal# the taxpayer may still enter into a compromise settlement o( his tax lia ility (or

Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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as lon* as any o( the *rounds (or a compromise# i.e. dou t(ul )alidity o( assessment and (inancial incapacity o( taxpayer# is present. , compromise o( a tax lia ility is possi le at any sta*e o( liti*ation# e)en durin* appeal# althou*h le*al propriety demands that prior lea)e o( court should e o tained (Easudeco )s. cir l1787I># June $8# "8I$).

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Prepared by the TAX LAW SECTION Chief SOCRATES PADUA Assistant Chief JOAN BIBAT Members DONNAMARIE CAJIGAN, CHARISMA NAIDA CASTILLO, LILYBETH SINDAYEN, CORAZON BATAD, AIE COLLADO, DANNY LATAWAN, CHRISTINE ELVENA, LILIAN MARANES. All Right R! !"#!$ by the SAINT LOUIS UNIVERSITY COLLEGE O% LAW BAR OPERATIONS &''(.

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