Taxation Law Review Final Examinations Far Eastern University Institute of Law Atty. Edwin Abella October 8, 2013
Dindong and Marian are husband and wife, both i!i"inos and residents of #ue$on %it& who are both em"!o&ed b& 'raser Pharmaceutica! %or"oration ('P%), a domestic cor"oration* Dindong is the +ice President for the Lega! De"artment and is receiving the fo!!owing from his em"!o&ment and other sources for the ca!endar &ear 2012, 1* -a!ar& of P3.0,000 a month* 2* /e"resentation a!!owance of P20,000 "er month which he is re0uired to !i0uidate not !ater than 1 da&s after the end of the month* 2n& un!i0uidated amount wi!! be deducted from his 34ed month!& trans"ortation a!!owance of P1.,000, but a!! these re"resentation a!!owances has been actua!!& s"ent* 3* ree tuition fee to 3nish a Mastera! Degree at 2sian 5nstitute of Management amounting to P136,000 for the &ear* 6* One bag of .0 7i!ogram 8asmine rice ever& month worth P6,900* .* One bag of .0 7i!ogram washed sugar ever& month worth P1,.00* 6* 2nua! dues with 5:P amounting to P2,060 and annua! dues with the 2merican :ar 2ssociation for P3,600* 1* Director;s fee of P10,000 "er meeting which is re0uired to be conducted ever& 1st Monda& of the month* 9* Pri$e from a tennis tournament s"onsored b& /D% amounting to P20,000* <* 5nterest on :an7 De"osit with Metroban7 amounting to P.00,000* 10* 5nterest on a !oan to a friend amounting to P200,000* 11* =ain from sa!e of shares of stoc7s of PLD> which are not traded in the stoc7 e4change in the amount of P1.0,000* 12* =ain from dis"osition of shares of stoc7s of a foreign cor"oration ac0uired in 200< amounting to P200,000* 13* >he withho!ding ta4 certi3cate re?ects P1,319,6<9 as ta4es remitted on com"ensation income for the &ear* Marian is the +ice President for Mar7eting and is entit!ed to the fo!!owing, 1* -a!ar& of P620,000 a month* 2* i4ed re"resentation a!!owances P20,000 a month* 3* 2 new @onda %/+ worth 1*36 Mi!!ion* 6* 2nnua! dues with Phi!i""ine Medica! 2ssociation amounting to P2,120* .* %ost of foreign trave! to attend a seminar for mar7eting e4ecutives he!d in Aashington amounting to P120,000* 6* 2n interestBfree !oan amounting to P2 Mi!!ion re!eased to her in 8anuar& 2012 "a&ab!e in 3 &ears* 1* 2nnua! "remium of P20,000for an insurance ta7en b& 'P% amounting to P2 Mi!!ion naming a who!!& ownded subsidiar&, 2b!e %or"oration, as the bene3ciar&* 9* Pri$e from a commercia! raCe amounting to P10,000* <* /o&a!ties "aid b& /e4 :oo7store on her authorshi" of a bestse!!er Mar7eting :oo7 "ub!ished in 2012, amounting to P120,000*00 10* >ota! ta4es withhe!d and remitted on Marian;s com"ensation for the &ear is P1,.11,301* >he s"ouses have three (3) !egitimate chi!dren and one (1) !ega!!& ado"ted chi!d who are a!! !iving with them and de"endent u"on them for chief su""ort* >he o!dest !egitimate chi!d ce!ebrated his 21st birthda& on 8anuar& 1, 2012 and the ado"ted chi!d became gainfu!!& em"!o&ed on December 1., 2012 u"on turning 21 &ears o!d* On 2"ri! 21, 2012, the s"ouses donated a residentia! !ot with a fair mar7et va!ue of P2 Mi!!ion in favor of their ado"ted chi!d and 3ancee who are to be married in the succeeding &ear* >he 6 chi!dren are a!! covered b& hea!th and hos"ita!i$ation insurance for which the husband was "a&ing a "remium of P3,000 "er chi!d "er annum* >he husband waived his right to c!aim for additiona! "ersona! e4em"tion in favor of his wife* >he s"ouses a!so o"erate a car re"air sho", DDM Motors which is du!& registered for +2> "ur"oses and earned service sa!esE revenues of P6*2 mi!!ion during 2012* >he& started the &ear with $ero receivab!es from customers but as of December 31, 2012, P200,000 remains unco!!ected on the services rendered that &ear* >he e4"enses for the o"erations of the business are com"rised of, 1* -a!aries of the two mechanics and the cashier at the rate of the statutor& minimum wage in Metro Mani!a of P6.6 "er da&* >he tota! sa!aries "aid is P6<,320* '0uiva!ent to P166,660 "er em"!o&ee (P6.6 4 36. da&s)* 2* @a$ard "a& of P20,000 each was "aid to the 2 mechanics, over the "a& and night shift diFerentia! "a& amounted to P30,000 each for the 3 em"!o&ees* 3* >he mechanics area!so given commission of .G of their res"ective bi!!ings as fo!!ows, Mechanic Pano&, P <0,000, Mechanic 2bno& 120,000* 1* 2!! of the above "a&ments were not subHected to withho!ding ta4 due to the honest be!ief of the s"ouses that the minimum wage earners are e4em"t from income ta4* 2* /enta! e4"enses (net of the 12G +2> "assedBon b& !essor) amounted to P260,000 for the &ear for which the .G '4"anded Aithho!ding >a4 was "ro"er!& deducted and remitted to the government* 3* Purchase of e0ui"ment at the start of the &ear (Hanuar&) amounted to P1,200,000 (e4c!usive of 12G +2>) and e4"ected to be used for . &ears* 6* -"are "arts and other su""!ies "urchased from +2>Bsu""!iers amounted to P1.0,000 (net of the 12G +2>) .* 2!! "urchases from +2>Bsu""!iers are covered either b& +2> invoice or +2> oIcia! recei"t* >here are no in"ut ta4es at the start of the &ear* 'P%, is a +2>Bregistered trader of "harmaceutica! "roducts* 5ts sa!es for 2012 amounted to P.00 Mi!!ion* >he &ear started with an inventor& of P. Mi!!ion* >he "urchases for the &ear amounted to P600 Mi!!ion but P.0 Mi!!ion worth of merchandise remained unso!d as of December 31* >hese were a!! "urchased from +2>Bregistered su""!iers* 2!! the in"ut ta4es in the "revious &ear were fu!!& uti!i$ed in "a&ment of its out"ut ta4es for that &ear* 'P% received cash dividends amounting to P2 Mi!!ion, from :arac7 %or"oration, a J*-* %or"oration deriving 60G of its gross income from Phi!i""ine sources through its branch in Pasig %it&* >he tota! administrative and se!!ing e4"enses incurred b& 'P% for 2012 amounted to P100 Mi!!ion inc!usive of a!! the "a&ments made for the bene3t of the s"ouses, Dindong and Marian* On -e"tember 30, 2013, 'P%, through its cor"orate oIces, received a ina! 2ssessment Kotice from the %ommissioner of 5nterna! /evenue re?ecting de3cienc& 5ncome >a4 and +a!ueB2dded >a4 for ta4ab!e &ear 2011* >he "rocedures re0uired for the issuance of a va!id assessement were re!igious!& fo!!owed b& the %5/* Your services are now engaged by the spouses Dindong and Marian to address the following concerns: 1. Determine the types of income that each should declare in their Income Tax eturn for the year !"1!. #repare a list with the corresonding amount of all returnable income of the spouses. !. $ow much is the gross income of Dindong and Marian to be declared in their income tax return% &. $ow should these incomes be re'ected in the income tax return% (xplain the procedures by citing provisions of the income tax law to support your position. ). Identify the incomes that are not re*uired to be declared in the income tax return and give the reasons for each. +lso indicate the amount of such income you have identi,ed- the amount of tax thereon if sub.ect to tax- or indicate if the income if exempt from income tax. /ite the legal basis for each item. 0. $ow much is the amount of personal exemption 1basic and additional2 that Dindong and Marian may claim in their income tax return% 3. 4hat are the deductions that can be claimed by Dindong and Marian% Indicate the amount and the reason for their deductibility and cite your legal bases. 5. 4hat are the items not deductible% 6ive reasons and cite your legal bases. 7. $ow much is the taxable compensation income of Dindong and Marian% 6ive reasons for your computation and cite your legal bases. 8. $ow much is the taxable business income of Dindong and Marian% 6ive reasons for your computation and give legal bases. 1". $ow much is the respective total taxable income 1tax base2 of the spouses% 11. $ow much is the income tax liablity per income tax return of Dindong and Marian% 1!. 4hat are the donor9s tax implications of the donation made by the spouses in !"1!% Determine the amount of donor9s tax due from each donation made. 1&. /alculate the :+T exposure of Dindong and Marian for !"1! 1aanuali;ed determination2 and explain how you arrived at that amount. 1). $ow much is the taxable income of (#/ in its income tax return for the taxable year !"1!% <upport your answer with explanation and legal bases of what should be included or excluded in your computations 1both on income and deductions2 10. /alculate the :+T exposure of (#/ for !"1! and explain your position. 13. (xplain the legal remedies available to (#/ on the =inal +ssessment >otice for taxable year !"11.