1. Vanderful, lnc.
's income tax return for taxable year 2015 showed an overpayment due to owner is granted an option to repurchase the lot on or before an agreed date. Henry
excess creditable withholding taxes in the amount of P750,000.00. The company opted to
carry over the excess income tax credits as tax credit against its quarterly income tax
liabilities for the next succeeding years. For taxable year 2016, the company's income tax
return showed an overpayment due to excess creditable withholding taxes in the amount
of P1,100,000.00, which included the carry-over from year 2015 in the amount of
P750,000.00 because its operations resulted in a net loss; hence, there was no application
for any tax liability. This time, the company opted and marked the box "To be refunded' in
respect of the total amount of P1,100,000.00.
Vanderful, Inc. now files in the BIR a claim for refund of unutilized overpayments of
P1,100,00.00. Is the claim meritorious? (2017 Bar)
2. Mapagbigay Corporation grants all its employees (rank and file, supervisors, and
managers) 5% discount of the purchase price of its products. During an audit investigation,
the BIR assessed the company the corresponding tax on the amount equivalent to the
courtesy discount received by all the employees, contending that the courtesy discount is
considered as additional compensation for the rank and file employees and additional fringe
benefit for the supervisors and managers. In its defense, the company argues that the
discount given to the rank and file employees is a de minimis benefit and not subject to tax.
As to its managerial employees, it contends that the discount is nothing more than a
privilege and its availment is restricted.
Is the BIR assessment correct? Explain. (2016 Bar)
3. Congress issued a law allowing a 20% discount on the purchases of senior
citizens from, among others, recreation centers. This 20% discount can then be used by the
sellers as a "tax credit." At the initiative of BIR, however, Republic Act No. (RA) 9257 was
enacted amending the treatment of the 20% discount as a "tax deduction." Equity Cinema
filed a petition with the RTC claiming that RA 9257 is unconstitutional as it forcibly deprives
sellers a part of the price without just compensation.
[a] What is the effect of converting the 20% discount from a "tax credit" to a "tax
deduction"?
[b] If you are the judge, how will you decide the case? Briefly explain your answer.
(2016 Bar)
4. Peter is the Vice-President for Sales of Golden Dragon Realty Conglomerate, Inc.
(Golden Dragon). A group of five (5) foreign investors visited the country for possible
investment in the condominium units and subdivision lots of Golden Dragon. After a tour of
the properties for sale, the investors were wined and dined by Peter at the posh Conrad's
Hotel at the cost of Pl 50,000.00. Afterward, the investors were brought to a party in a
videoke club which cost the company P200,000.00 for food and drinks, and the amount of
P80,000.00 as tips for business promotion officers. Expenses at Conrad's Hotel and the
videoke receipted club were and submitted to support the deduction for representation
and entertainment expenses. Decide if all the representation and entertainment expenses
claimed by Golden Dragon are deductible. Explain. (2016 Bar)
Entertainment, amusement and recreation expense shall be allowed as a deduction from
gross income but in no case shall exceed:
1. For taxpayers engaged in sale of goods or properties – 0.50% of net sales (i.e.,
gross sales less sales returns or allowances and sales discounts)
2. For taxpayers engaged in sale of services, including exercise of profession and
use or lease of properties – 1% of net revenue (i.e., gross revenue less discounts)
3. For taxpayers deriving income from both sale of goods and services – the
allowable deduction shall in all cases be determined based on an apportionment
formula taking into consideration the percentage of the net sales/net revenue
to the total net sales/net revenue, but which in no case shall exceed the
maximum percentage ceiling provided (Sec. 5, RR 10-2002).
5. Henry, a U.S. naturalized citizen, went home to the Philippines to reacquire
Philippine citizenship under RA 9225. His mother left him a lot and building in Makati City
and he wants to make use of it in his trading business. Considering that he needs money for
the business, he wants to sell his lot and building and make use of the consideration.
However, the lot has sentimental value and he wants to reacquire it in the future. A friend
of Henry told him of the "sale-leaseback transaction" commonly used in the U.S., which is
also used for tax reduction. Under said transaction, the lot owner sells his property to a
buyer on the condition that he leases it back from the buyer. At the same time, the property
approaches you as a tax lawyer for advice.
Explain what tax benefits, if any, can be obtained by Henry and the buyer from the sale-
leaseback transaction? (2016 Bar)
6. Patrick is a successful businessman in the United States and he is a sole
proprietor of a supermarket which has a gross sales of $10 million and an annual income of
$3 million. He went to the Philippines on a visit and, in a party, he saw Atty. Agaton who
boasts of being a tax expert. Patrick asks Atty. Agaton: if he (Patrick) decides to reacquire
his Philippine citizenship under RA 9225, establish residence in this country,a and open
supermarket in Makati City, will the BIR tax him on the income he earns from his U.S.
business? If you were Atty. Agaton, what advice will you give Patrick? (2016 Bar)
Section 23. General Principles of Income Taxation in the Philippines. - Except when
otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived
from sources within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within
the Philippines;
Section 22. Definitions
(E) The term 'nonresident citizen' means:
(1) A citizen of the Philippines who establishes to the satisfaction of the
Commissioner the fact of his physical presence abroad with a definite intention
to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable year
to reside abroad, either as an immigrant or for employment on a permanent
basis.
(3) A citizen of the Philippines who works and derives income from abroad and
whose employment thereat requires him to be physically present abroad most
of the time during the taxable year.
(4) A citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of his arrival in the
Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his intention
of leaving the Philippines to reside permanently abroad or to return to and
reside in the Philippines as the case may be for purpose of this Section.
7. Rakham operates the lending company that made a loan to Alfonso in the
amount of Pl20,000.00 subject of a promissory note which is due within one (1) year from
the note's issuance. Three years after the loan became due and upon information that
Alfonso is nowhere to be found, Rakham asks you for advice on how to treat the obligation
as "bad debt." Discuss the requisites for deductibility of a "bad debt?" (2016 Bar)
1. The debts are Uncollectible despite diligent effort exerted by the taxpayer;
To prove that the taxpayer exerted diligent efforts to collect the debts:
1. Sending of statement of accounts;
2. Sending of collection letters;
3. Giving the account to a lawyer for collection; and
4. Filing a collection case in court.
2. Existing indebtedness Subsisting due to the taxpayer which must be valid and legally
demandable;
3. Connected with the taxpayer’s Trade, business or practice of profession;
4. Actually Charged off in the books of accounts of the taxpayer as of the end of the taxable
year;
5. Actually Ascertained to be worthless and uncollectible as of the end of the taxable year;
and
NOTE: In lieu of requisite No. 5, the BSP, thru its Monetary Board, shall approve
the writing off of said indebtedness from the banks’ books of accounts at the
end of the taxable year (R.R. 5-1999). In no case may a receivable from an
insurance or surety company be written off from the taxpayer’s books and
claimed as bad debts deduction unless such company has been declared closed
due to insolvency or for any such similar reason by the Insurance Commissioner
(R.R. 5-1999).
6. Must not be sustained in a transaction entered into between Related parties.
8. Mr. A, a citizen and resident of the Philippines, is a professional boxer. In a professional
boxing match held in 2013, he won prize money in United States (US) dollars equivalent to
P300,000,000.
a) Is the prize money paid to and received by Mr. A in the US taxable in the Philippines?
Why?
b) May Mr. A's prize money qualify as an exclusion from his gross income? Why? b) Resident alien on income derived from sources within the Philippines.

c) The US already imposed and withheld income taxes from Mr. A's prize money. How may c) Resident citizen earning purely compensation income from two employers within the
Mr. A use or apply the income taxes he paid on his prize money to the US when he computes Philippines, whose income taxes have been correctly withheld.
his income tax liability in the Philippines for 2013? (2015 Bar)
d) Resident citizen who falls under the classification of minimum wage earners.
a. YES. Under the NIRC, the income within and without of a resident citizen is taxable. Since
Mr. A is a resident Filipino citizen, his income worldwide is taxable in the Philippines. e) An individual whose sole income has been subjected to final withholding tax.
b. NO. Under the law, all prizes and awards granted to athletes in local and international
sports competitions whether held in the Philippines or abroad and sanctioned by their
national sports association are excluded from gross income. However, in this case, there is
no showing that the boxing match was sanctioned by the Philippine National Sports 12. What are de minimis benefits and how are these taxed? Give three (3) examples of de
Commission. Therefore, the prize money is not excluded. minimis benefits. (2015 Bar)
c. Mr. A may avail of tax credit against his tax liability in the Philippines for taxes paid in
foreign countries. He has to signify in his income tax return his desire to avail the deduction. These are facilities or privileges furnished or offered by an employer to his employees that
are of relatively small value and are offered or furnished by the employer merely as a means
of promoting the health, goodwill, contentment and efficiency of his employees.
9. Ms. C, a resident citizen, bought ready-to-wear goods from Ms. B, a nonresident citizen.
Monetized unused vacation leave credits of Qualify:
a) If the goods were produced from Ms. B's factory in the Philippines, is Ms. B's income from employees 1. Private employees:
the sale to Ms. C taxable in the Philippines? Explain. a. Vacation leave - exempt up to 10 days
b. Sick leave – always taxable
b) If Ms. B is an alien individual and the goods were produced in her factory in China, is Ms. 2. Government employees:
B's income from the sale of the goods to Ms. C taxable in the Philippines? Explain. (2015
Bar) Vacation and sick leave are always tax
exempt regardless of the number of
a. YES. The income of Ms. B from the sale of ready-to-wear goods to Ms. C is days.
taxable. A nonresident citizen is taxable only on income derived from sources Medical cash allowance to dependents of Not exceeding ₱750 per semester or
within the Philippines. In line with the source rule of income taxation, since the employees ₱125 per month
goods are produced and sold within the Philippines, Ms. B’s Philippine-sourced Rice subsidy ₱1,500 or one sack of 50-kg rice per
income is taxable in the Philippines. month amounting to not more than
b. YES. But only a proportionate part of the income. Gains, profits and income from P1,500
the sale of personal property produced by the taxpayer without and sold within Uniforms and clothing allowances Not exceeding ₱5,000 per annum (R.R.
the Philippines, shall be treated as derived part. 8-2012)
Actual medical assistance, e.g. medical Not exceeding ₱10,000 per annum
allowance to cover medical and healthcare
10. BBB, Inc., a domestic corporation, enjoyed a particularly profitable year in 2014. In June needs, annual medical/executive check up,
2015, its Board of Directors approved the distribution of cash dividends to its stockholders. maternity assistance, and routine
BBB, Inc. has individual and corporate stockholders. What is the tax treatment of the cash consultations
dividends received from BBB, Inc. by the following stockholders: Laundry allowance Not exceeding ₱300 per month

a) A resident citizen Employee achievement awards under an In the form of tangible personal
established written plan which does not property other than cash or gift
b) Non-resident alien engaged in trade or business discriminate in favor of highly paid certificate with an annual monetary
employees value not exceeding ₱10,000
c) Non-resident alien not engaged in trade or business (e.g. for length of service or safety
achievement)
d) Domestic corporation Gifts given during Christmas and major Not exceeding ₱5,000 per employee
anniversary celebrations per annum
e) Non-resident foreign corporation (2015 Bar) Daily meal allowance for overtime work Not exceeding 25% of the basic
minimum wage on a per region basis
a. A final withholding tax of 10% shall be imposed upon cash dividends actually or Benefits received by virtue of Collective Not exceeding ₱10,000 per employee
constructively received by a resident citizen from BBB, Inc (Sec. 24(b)(2), NIRC). Bargaining Agreement (CBA) and per annum (R.R. 1-2015)
productivity incentive scheme
b. A final withholding tax of 20% shall be imposed upon cash dividends actually or
constructively received by a non-resident alien engaged in trade or business from BBB, Inc.
(Sec. 24(a)(2), NIRC). 13. Mr. H decided to sell the house and lot wherein he and his family have lived for the past
10 years, hoping to buy and move to a new house and lot closer to his children's school.
c. A final withholding tax equal to 25% of the entire income received from all sources within
Concerned about the capital gains tax that will be due on the sale of their house, Mr. H
the Philippines, including the cash dividends received from BBB, Inc. (Sec. 25(b), NIRC).
approaches you as a friend for advice if it is possible for the sale of their house to be
d. Dividends received by a domestic corporation from another domestic corporation, such
as BBB, Inc., shall not be subject to tax (Sec. 27(d)(4), NIRC). exempted from capital gains tax and the conditions they must comply with to avail
themselves of said exemption. How will you respond? (2015 Bar)
e. Dividends received by a non-resident foreign corporation from a domestic corporation
are generally subject to an income tax of 30% to be withheld at source (Sec. 28 (b)(1), NIRC). Mr. H may avail the exemption from capital gains tax on sale of principal residence by
natural persons. Under the law, the following are the requisites:
However, a final withholding tax of 15% is imposed on the amount of cash dividends 1) proceeds of the sale of the principal residence have been fully utilized in acquiring or
received from a domestic corporation like BBB, Inc. if the tax sparing rule applies (Sec. constructing new principal residence within eighteen (18) calendar months from the date
28(B)(5)(b), NIRC). Pursuant to this rule, the lower rate of tax would apply if the country in of sale or disposition;
which the non-resident foreign corporation is domiciled would allow as a tax credit against 2) The historical cost or adjusted basis of the real property sold or disposed will be carried
the tax due from it, taxes deemed paid in the Philippines of 15% representing the difference over to the new principal residence built or acquired;
between the regular income tax rate and the preferential rate. 3) The Commissioner has been duly notified, through a prescribed return, within thirty (30)
days from the date of sale or disposition of the person’s intention to avail of the tax
exemption; and
11. Indicate whether each of the following individuals is required or not required to file an 4) Exemption was availed only once every ten (10) years.
income tax return:

a) Filipino citizen residing outside the Philippines on his income from sources outside the 14. GGG, Inc. offered to sell through competitive bidding its shares in HHH Corp., equivalent
Philippines. to 40% of the total outstanding capital stock of the latter. JJJ, Inc. acquired the said shares
in HHH Corp. as the highest bidder. Before it could secure a certificate authorizing
registration/tax clearance for the transfer of the shares of stock to JJJ, Inc., GGG, Inc. had to
request a ruling from the BIR confirming that its sale of the said shares was at fair market
value and was thus not subject to donor's tax. In BIR Ruling No. 012-14, the CIR held that
the selling price for the shares of stock of HHH Corp. was lower than their book value, so
the difference between the selling price and the book value of said shares was a taxable
donation. GGG, Inc. requested the Secretary of Finance to review BIR Ruling No. 012-14, but
the Secretary affirmed said ruling. GGG, Inc. filed with the Court of Appeals a Petition for
Review under Rule 43 of the Revised Rules of Court. The Court of Appeals, however,
dismissed the Petition for lack of jurisdiction declaring that it is the CTA which has
jurisdiction over the issues raised. Before which Court should GGG, Inc. seek recourse from
the adverse ruling of the Secretary of Finance in the exercise of the latter's power of review?
(2015 Bar)
15. KKK Corp. secured its Certificate of Incorporation from the Securities and Exchange
Commission on June 3, 2013. It commenced business operations on August 12, 2013. In
April 2014, Ms. J, an employee of KKK Corp. in charge of preparing the annual income tax
return of the corporation for 2013, got confused on whether she should prepare payment
for the regular corporate income tax or the minimum corporate income tax.
a) As Ms. J's supervisor, what will be your advice?
b) What are the distinctions between regular corporate income tax and minimum corporate
income tax? (2015 Bar)
a. As Ms. J’s supervisor, I will advise that KKK Corp. should prepare payment for the regular
corporate income tax and not the minimum corporate income tax (MCIT). Under the NIRC,
MCIT is only applicable beginning the 4th taxable year following the commencement of
business operation (Sec. 27(e)(1), NIRC).
b. The distinctions between regular corporate income tax and the minimum corporate
income tax are the following:
1. As to taxpayer: Regular corporate income tax applies to all corporate
taxpayers while minimum corporate income tax applies to domestic
corporations and resident foreign corporations.
2. As to tax rate: Regular corporate income tax is 30% while minimum corporate
income tax is 2%.
3. As to tax base: Regular corporate income tax is based on the net taxable
income while minimum corporate income tax is based on gross income.
4. As to period of applicability: Regular corporate income tax is applicable once
the corporation commenced its business operation, while minimum corporate
income tax is applicable beginning on the 4th taxable year following the
commencement of business operations.
5. As to imposition: The minimum corporate income tax is imposed whenever it
is greater than the regular corporate income tax o the corporation (Sec. 27(A)
and (E), NIRC; RR No. 998).
16. In 2012, Dr. K decided to return to his hometown to start his own practice. At the end
of 2012, Dr. K found that he earned gross professional income in the amount of
P1,000,000.00; while he incurred expenses amounting to P560,000.00 constituting mostly
of his office space rent, utilities, and miscellaneous expenses related to his medical practice.
However, to Dr. K's dismay, only P320,000.00 of his expenses were duly covered by receipts.
What are the options available for Dr. K so he could maximize the deductions from his gross
income? (2015 Bar)
Dr. K may opt to use the optional standard deduction (OSD) in lieu of the itemized deduction. OSD 22.isHopeful
during the taxable year. Proof of actual expenses is not required, but Dr. K shall keep such records
17. Dr. Taimtim is an alumnus of the College of Medicine of Universal University (UU), a
privately-owned center for learning which grants yearly dividends to its stockholders. UU
has a famous chapel located within the campus where the old folks used to say that anyone
who wanted to pass the medical board examinations should offer a dozen roses on all the
Sundays of October. This was what Dr. Taimtim did when he was still reviewing for the board
examinations. In his case, the folk saying proved to be true because he is now a successful
cardiologist. Wanting to give back to the chapel and help defray the costs of its
maintenance, Dr. Taimtim donated P50,000.00 to the caretakers of the chapel which was
evidenced by an acknowledgment receipt.
In computing his net taxable income, can Dr.Taimtim use his donation to the chapel as an
allowable deduction from his gross income under the National Internal Revenue Code
(NIRC)? (2014 Bar)
No, part of the net income of the university inures to the benefit of its private stockholders
(NIRC, Sec. 34 [H]).
18. Mr. Gipit borrowed from Mr. Maunawain P100,000.00, payable in five (5) equal monthly
installments. Before the first installment became due, Mr. Gipit rendered general cleaning
services in the entire office building of Mr. Maunawain, and as compensation therefor, Mr.
Maunawain cancelled the indebtedness of Mr. Gipit up to the amount of P75,000.00. Mr.
Gipit claims that the cancellation of his indebtedness cannot be considered as gain on his
part which must be subject to income tax, because according to him, he did not actually
receive payment from Mr. Maunawain for the general cleaning services. Is Mr. Gipit correct?
Explain. (2014 Bar)
NO. Section 50 of Rev. Regs. No. 2, otherwise known as Income Tax Regulations, provides
that if a debtor performs services for a creditor who cancels the debt in consideration for
such services, the debtor realizes income to that amount as compensation for his services.
In the given problem, the cancellation of Mr. Gipit’s indebtedness up to the amount of Php
75,000.00 gave rise to compensation income subject to income tax, since Mr. Maunawain
condoned such amount as consideration for the general cleaning services rendered by Mr.
Gipit.
19. Which of the following is an exclusion from gross income?
(A) Salaries and wages
(B) Cash dividends
(C) Liquidating dividends after dissolution of a corporation
(D) De minimis benefits
(E) Embezzled money (2014 Bar)
20. Triple Star, a domestic corporation, entered into a Management Service Contract with
Single Star, a non-resident foreign corporation with no property in the Philippines. Under
the contract, Single Star shall provide managerial services for Triple Star’s Hongkong branch.
All said services shall be performed in Hongkong.
Is the compensation for the services of Single Star taxable as income from sources within
the Philippines? Explain. (2014 Bar)
21. Which of the following should not be claimed as deductions from gross income?
(A) discounts given to senior citizens on certain goods and services.
(B) advertising expense to maintain some form of goodwill for the taxpayer’s
business.
(C) salaries and bonuses paid to employees.
(D) interest payment on loans for the purchase of machinery and equipment used
in business. (2014 Bar)
a maximumCorporation obtained(40%)
of forty percent a loanoffrom
grossGenerous
receipts Bank and executed a mortgage on
itspertaining to histogross
real property receipts.
secure the loan. When Hopeful Corporation failed to pay the loan,
Generous Bank extrajudicially foreclosed the mortgage on the property and acquired the
same as the highest bidder. A month after the foreclosure, Hopeful Corporation exercised
its right of redemption and was able to redeem the property. Is Generous Bank liable to pay
capital gains tax as a result of the foreclosure sale? Explain. (2014 Bar)
23. On August 31, 2014, Haelton Corporation (HC), thru its authorized representative Ms.
Pares, sold a 16-storey commercial building known as Haeltown Building to Mr. Belly for
P100 million. Mr. Belly, in turn, sold the same property on the same day to Bell Gates, Inc.
(BGI) for P200 million. These two (2) transactions were evidenced by two (2) separate Deeds
of Absolute Sale notarized on the same day by the same notary public.
Investigations by the Bureau of Internal Revenue (BIR) showed that:
(1) the Deed of Absolute Sale between Mr. Belly and BGI was notarized ahead of the sale
between HC and Mr. Belly; (2) as early as May 17, 2014, HC received P40 million from BGI,
and not from Mr. Belly; (3) the said payment of P40 million was recorded by BGI in its books
as of June 30, 2014 as investment in Haeltown Building; and (4) the substantial portion of
P40 million was withdrawn by Ms. Pares through the declaration of cash dividends to all its
stockholders.
Based on the foregoing, the BIR sent Haeltown Corporation a Notice of Assessment for
deficiency income tax arising from an alleged simulated sale of the aforesaid commercial
building to escape the higher corporate income tax rate of thirty percent (30%). What is the
liability of Haeltown Corporation, if any? (2014 Bar)
24. A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that they can
practice their profession as lawyers. For the year 2012, ABC Law Firm received earnings and
paid expenses, among which are as follows:
Earnings:
(1) Professional/legal fees from various clients
(2) Cash prize received from a religious society in recognition of the
exemplary service of ABC Law Firm
(3) Gains derived from sale of excess computers and laptops
Payments:
(1) Salaries of office staff
(2) Rentals for office space
(3) Representation expenses incurred in meetings with clients
(A) What are the items in the above mentioned earnings which should be included
in the computation of ABC Law Firm’s gross income? Explain.
(B) What are the items in the above-mentioned payments which may be
considered as deductions from the gross income of ABC Law Firm? Explain.
(C) If ABC Law Firm earns net income in 2012, what, if any, is the tax consequence
on the part of ABC Law Firm insofar as the payment of income tax is concerned? What, if
any, is the tax consequence on the part of A, B, and C as individual partners, insofar as the
payment of income tax is concerned? (2014 Bar)
25. Freezy Corporation, a domestic corporation engaged in the manufacture and sale of ice
cream, made payments to an officer of Frosty Corporation, a competitor in the ice cream
business, in exchange for said officer’s revelation of Frosty Corporation’s trade secrets. May
Freezy Corporation claim the payment to the officer as deduction from its gross income?
Explain.( 2014 Bar)
NO. payments made in exchange for the revelation of a competitor’s trade secrets is
considered as an expense which is against law, morals, good customs or public policy, which
is not deductible (3M Philippines, Inc. v. CIR, G.R. No. 82833, September 26, 1988).
Also, the law will not allow the deduction of bribes, kickbacks and other similar payments.
Applying the principle of ejusdem generis, payment made by Freezy Corporation would fall
under “other similar payments” which are not allowed as deduction from gross income
(Section 34(A)(l)(c), NIRC).
26. In January 2013, your friend got his first job as an office clerk. He is single and lives with
his family who depends upon him for financial support. His parents have long retired from
their work, and his two (2) siblings are still minors and studying in grade school. In February
2014, he consulted you as he wanted to comply with all the rules pertaining to the
preparation and filing of his income tax return. He now asks you the following:
(A) Is he entitled to personal exemptions? If so, how much?
(B) Is he entitled to additional exemptions? If so, how much?
(C) What is the effect of the taxes withheld from his salaries on his taxable income?
(2014 Bar)
27. In its final adjustment return for the 2010 taxable year, ABC Corp. had excess tax credits
arising from its over-withholding of income payments. It opted to carry over the excess tax
credits to the following year. Subsequently, ABC Corp. changed its mind and applied for a
refund of the excess tax credits. Will the claim for refund prosper? (2013 Bar)
NO; it is barred by the irrevocability rule. If the corporation opts to carry-over its excess
credit in the final adjustment return, its choice shall be irrevocable for that taxable period.
The purpose of this rule is to prevent a taxpayer from claiming excess tax credits twice. In
the given problem, ABC Corp. opted to carry-over its excess tax credits for the 2010 taxable
year. Consequently, ABC Corp. can no longer revoke its choice to carry-over the excess tax
credits and instead claim for a refund.
29. A group of philanthropists organized a non-stock, non-profit hospital for charitable
purposes to provide medical services to the poor. The hospital also accepted paying patients
although none of its income accrued to any private individual; all income were plowed back
for the hospital's use and not more than 30% of its funds were used for administrative
purposes.
Is the hospital subject to tax on its income? If it is, at what rate? (2013 Bar)
SUGGESTED ANSWER: Yes. Although a non-stock non-profit hospital organized for
charitable purposes, is generally exempt from income tax, it becomes taxable on income
derived from activities conducted for profit. Services rendered to paying patients are
considered activities conducted for profit which are subject to income tax, regardless of the
disposition of said income. The hospital is subject to income tax of 10% of its net income
derived from the paying patients considering that the income earned appears to be derived
solely from hospital-related activities (CIR v. St. Luke’s Medical Center, Inc., G.R. Nos.
195909 & 195960, Sept 26, 2012).
ANOTHER SUGGESTED ANSWER: No. The hospital is organized exclusively for charitable
purposes and since no part of its income inures to the benefit of any private individual, it
should not lose its exempt character by simply admitting paying patients. The revenues
derived from paying patients are necessary to maintain “its head above the waters” and
allow it to sustain its charitable activities (YMCA v. CA & CIR, 298 SCRA 83, 91 [Oct 14, 1998,
G.R. NO. 124043).
30. Atty. Gambino is a partner in a general professional partnership. The partnership
computes its gross revenues, claims deductions allowed under the Tax Code, and distributes
the net income to the partners, including Atty. Gambino, in accordance with its articles of
partnership. In filing his own income tax return, Atty. Gambino claimed deductions that the
partnership did not claim, such as purchase of law books, entertainment expenses, car
insurance and car depreciation. The BIR disallowed the deductions.
Was the BIR correct?
No. The BIR is wrong in disallowing the deductions claimed by Atty. Gambino. It appears
that the general professional partnership (GPP) claimed itemized deductions from its gross
revenues in arriving at its distributable net income. The share of a partner in the net income
of the GPP must be reported by him as part of his gross income from practice of profession
and he is allowed to claim further deductions which are reasonable, ordinary and necessary
in the practice of profession and were not claimed by the partnership in computing its net
income (Sec 26, NIRC; RR No. 16-2008; 2-2010).
31. XYZ Law Offices, a law partnership in the Philippines and a VAT-registered taxpayer,
received a query by e-mail from Gainsburg Corporation, a corporation organized under the
laws of Delaware, but the e-mail came from California where Gainsburg has an office.
Gainsburg has no office in the Philippines and does no business in the Philippines.
XYZ Law Offices rendered its opinion on the query and billed Gainsburg US$1,000 for the
opinion. Gainsburg remitted its payment through Citibank which converted the remitted
US$1 ,000 to pesos and deposited the converted amount in the XYZ Law Offices account.
What are the tax implications of the payment to XYZ Law Offices in terms of VAT and income
taxes? (2013 Bar)
The payment to XYZ Law Offices by Gainsburg Corporation is subject to VAT and income tax
in the Philippines. For VAT purposes, the transaction is a zero-rated sale of services where
the output tax is zero percent and XYZ is entitled to claim as refund or tax credit certificate
the input taxes attributable to the zero-rated sale. The services were rendered to a
nonresident person, engaged in business outside the Philippines, which services are paid for
in foreign currency inwardly remitted through the banking system, thereby making the sale
of services subject to tax at zero-rate. (Sec 108 (B)(2), NIRC)
32. In 2000, Mr. Belen bought a residential house and lot for PI ,000,000. He used the
property as his and his family's principal residence. It is now year 2013 and he is thinking of
selling the property to buy a new one. He seeks your advice on how much income tax he
would pay if he sells the property. The total zonal value of the property is P5,000,000 and
the fair market value per the tax declaration is P2,500,000. He intends to sell it for
P6,000,000.
What material considerations will you take into account in computing the income tax?
Please explain the legal relevance of each of these considerations. (2013 Bar)
Since the planned sale involves a real property classified as a capital asset, the material
considerations to take into account to compute the income tax are:
1. The current fair market value of the property to be sold. The current fair market value is
the higher between the zonal value and the fair market value per tax declaration.
2. The gross selling price of the property.
3. Determination of the tax base which is the higher between the gross selling price and the
current fair market of the property.
The income tax is computed as 6% of the tax base which is in the nature of a final capital
gains tax. (Sec 24 (D)(1), NIRC).
However, since the property to be sold is a principal residence and the purpose is to buy a
new one, I will advise Mr. Belen that the sale can be exempt from 6% capital gains tax if he
is willing to comply with the following conditions:
a. He must utilize the proceeds of sale acquiring a new principal residence within 18 months
from the date of disposition;
b. He should notify the Commissioner of his intention to avail of the exemption within 30
days from date of sale;
c. He should open an escrow account with a bank and deposit the 6% capital gains tax due
on the sale. If he complies with the utilization requirement he will be entitled to get back
his deposit; otherwise, the deposit will be applied against the capital gains tax due. (Sec 24
(D)(2), NIRC
33. ABC Corp. was dissolved and liquidating dividends were declared and paid to the
stockholders.
What tax consequence follows?
(A) ABC Corp. should deduct a final tax of 10% from the dividends.
(B) The stockholders should declare their gain from their investment and pay
income tax at the ordinary rates.
(C) The dividends are exempt from tax.
(D) ABC Corp. should withhold a 10% creditable tax. (2013 Bar)
SUGGESTED ANSWER: (B) Section 39, BIR Ruling 39-02, Nov. 11, 2002
34. MGC Corp. secured an income tax holiday for 5 years as a pioneer industry. On the fourth
year of the tax holiday, MGC Corp. declared and paid cash dividends to its stockholders, all
of whom are individuals.
Are the dividends taxable?
(A) The dividends are taxable; the tax exemption of MGC Corp. does not extend to
its stockholders.
(B) The dividends are tax exempt because of MGC Corp.'s income tax holiday.
(C) The dividends are taxable if they exceed 50% of MGC Corp.'s retained earnings.
(D) The dividends are exempt if paid before the end of MGC Corp.'s fiscal year.
(2013 Bar)
SUGGESTED ANSWER: (A) Sunio v. NLRC, G.R. No. 57767, Jan. 31, 1984
35. Kenya International Airlines (KIA) is a foreign corporation, organized under the
laws of Kenya. It is not licensed to do business in the Philippines. Its commercial airplanes
do not operate within Philippine territory, or service passengers embarking from Philippine
airports. The firm is represented in the Philippines by its general agent, Philippine Airlines
(PAL), a Philippine corporation.
KIA sells airplane tickets through PAL, and these tickets are serviced by KIA airplanes outside
the Philippines. The total sales of airline tickets transacted by PAL for KIA in 1997 amounted
to P2,968,156.00. The Commissioner of Internal Revenue assessed KIA deficiency income
taxes at the rate of 35% on its taxable income, finding that KIA’s airline ticket sales
constituted income derived from sources within the Philippines.
KIA filed a protest on the ground that the P2,968,156.00 should be considered as income
derived exclusively from sources outside the Philippines since KIA only serviced passengers
outside Philippine territory.
Is the position of KIA tenable? Reasons. (2009 Bar)
No, KIA’s position is not tenable. The revenue it derived in 1997 from sales of airplane tickets
in the Philippines, through its agent PAL, is considered as income from within the
Philippines, subject to 35% tax based on its taxable income pursuant to Sec 25(a)(1) of the
Tax Code of 1997. The transacting of business in the Philippines through its local sales agent,
makes KIA a resident foreign corporation despite the absence of landing rights, thus, it is
taxable on income derived within. The source of an income is the property, activity or
service that produced the income. In the instant case, it is the sale of tickets in the
Philippines which is the activity that produced the income. KIA’s income being derived from
within is subject to Philippine income tax (CIR v. British Overseas Airways Corporation, 149
SCRA 395, (1987)).
36. Raffy and Wena, husband and wife, are both employed by XXX Corporation.
After office hours, they jointly manage a coffee shop at the ground floor of their house. The
coffee shop is registered in the name of both spouses. Which of the following is the correct
way to prepare their income tax return? Write the letter only. DO NOT EXPLAIN YOUR
ANSWER.
a. Raffy will declare as his income the salaries of both spouses, while Wena will
declare the income from the coffee shop.
b. Wena will declare the combined compensation income of the spouses, and
Raffy will declare the income from the coffee shop.
c. All the income will be declared by Raffy alone, because only one consolidated
return is required to be filed by the spouses.
d. Raffy will declare his own compensation income and Wena will declare hers.
The income from the coffee shop shall be equally divided between them. Each spouse shall
be taxed separately on their corresponding taxable income to be covered by one
consolidated return for the spouses.
e. Raffy will declare his own compensation income and Wena will declare hers.
The income from the coffee shop shall be equally divided between them. Raffy will file one
income tax return to cover all the income of both spouses, and the tax is computed on the
aggregate taxable income of the spouses. (2009 Bar)
d. Raffy will declare his own compensation income and Wena will declare hers. The income
from the coffee shop shall be equally divided between them. Each spouse shall be taxed
separately on their corresponding taxable income to be covered by one consolidated return
for the spouses.
37. YYY Corporation engaged the services of the Manananggol Law Firm in 2006 to
defend the corporation’s title over a property used in the business. For the legal services
rendered in 2007, the law firm billed the corporation only in 2008. The corporation duly
paid. YYY Corporation claimed this expense as a deduction from gross income in its 2008
return, because the exact amount of the expense was determined only in 2008. Is YYY’s
claim of deduction proper? Reasons. (2009 Bar)
No. The expense is deductible in the year it complies with the all-events test. The test is
considered met if the liability is fixed, and the amount of such liability to pay is already fixed
in 2007 when the services were rendered, and the amount of such liability is determinable
with reasonable accuracy in the same year. Hence the deduction should have been claimed
in 2007 and not in 2008 (CIR v. Isabela Cultural Corporation, 515 SCRA 556 (2007)).
38. Ernesto, a Filipino citizen and a practicing lawyer, filed his income tax return for
2007 claiming optional standard deductions. Realizing that he has enough documents to
substantiate his profession-connected expenses, he now plans to file an amended income
tax return for 2007, in order to claim itemized deductions, since no audit has been
commenced by the BIR on the return he previously filed. Will Ernesto be allowed to amend
his return? Why or why not? (2009 Bar)
No. Since Ernesto has elected to claim optional standard deduction, said election is
irrevocable for the taxable year for which the return is made (Sec 34(L), NIRC).
39. Johnny transferred a valuable 10-door commercial apartment to a designated
trustee, Miriam, naming in the trust instrument Santino, Johnny’s 10-year old son, as the
sole beneficiary. The trustee is instructed to distribute the yearly rentals amounting to
P720,000.00. The trustee consults you if she has to pay the annual income tax on the rentals
received from the commercial apartment.
a. What advice will you give the trustee? Explain.
b. Will your advice be the same if the trustee is directed to accumulate the rental
income and distribute the same only when the beneficiary reaches the age of majority? Why
or why not? (2009 Bar)
a. I will advise the trustee that she has nothing to pay in annual income taxes because the
trust’s taxable income is zero. This is so because the amount of income to be distributed
annually to the beneficiary is a deduction from the gross income of the trust but must be
reported as income of the beneficiary (Sec 61(A), NIRC).
b. No. The trustee has to pay the income tax in the trust’s net income determined annually
is the income is required to be accumulated. Once a taxable trust is established, its net
income is either taxable to the trust, represented by the trustee, or to the beneficiary
depending on the provision for distribution of income following the one-layer taxation
scheme (Sec 61 (A), NIRC).
40. Masarap Food Corporation (MFC) incurred substantial advertising expenses in
order to protect its brand franchise for one of its line products. In its income tax return, MFC
included the advertising expense as deduction from gross income, claiming it as an ordinary
business expense. Is MFC correct? Explain. (2009 Bar)
No. The protection of taxpayer’s brand franchise is analogous to the maintenance of
goodwill or title to one’s property which is in the nature of a capital expenditure. An
advertising expense as, of such nature does not qualify as an ordinary business expense,
because the benefit to be enjoyed by the taxpayer goes beyond one taxable year (CIR v.
General Foods Inc., 401 SCRA 545 (2003)).
41. In January 1970, Juan Gonzales bought one hectare of agricultural land in
Laguna for P100,000. This property has a current fair market value of P10 million in view of
the construction of a concrete road traversing the property. Juan Gonzales agreed to
exchange his agricultural lot in Laguna for a one-half hectare residential property located in
Batangas, with a fair market value of P10 million, owned by Alpha Corporation, a domestic
corporation engaged in the purchase and sale of real property. Alpha Corporation acquired
the property in 2007 for P9 million.
a) What is the nature of the real properties exchanged for tax purposes – capital asset or
ordinary asset? Explain.
b) Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax
base and rate? Explain.
c) Is Alpha Corporation subject to income tax on the exchange of property? If so, what is the
tax base and rate? Explain. (2008 Bar)
A. With regard to the Laguna property, it is a capital asset because it is agricultural land. The
Batangas property, in contrast, is an ordinary asset because it is either (1) held for sale to
customers in the ordinary course of business or (2) real property used in the trade of
business of a realtor like Alpha Corp (Secs. 24[D1], 39[A1]2 NIRC; and RR No. 7-2003).
b.Yes. Juan must pay final income tax of 6% of the gross selling price or the fair market value,
whichever is higher (Sec. 24[D1], NIRC; and RR No. 13-99).
c. Yes. Alpha must pay corporate income tax at the rate of 35% of the residential property’s
fair market value of P10 million (Sec. 27[A] NIRC). Corporate Income Tax: Who is a
Contractor (2013)
42. John McDonald, a U.S. citizen residing in Makati City, bought shares of stock of
a domestic corporation whose shares are listed and traded in the Philippine Stock Exchange
at the price of P2 million. Yesterday, he sold the shares of stock through his favorite Makati
stockbroker at a gain of P200,000.
a) Is John McDonald subject to Philippine income tax on the sale of his shares through his
stockbroker? Is he liable for any other tax? Explain.
b) If John McDonald directly sold the shares to his best friend, who is another U.S. citizen
residing in Makati, at a gain of P200,000, is he liable for Philippine income tax? If so, what is
the tax base and rate? (2008 Bar)
a.
a.No. R.A. 7717, now incorporated in Sec. 127 of the NIRC, provides that the sale of shares
of stock traded in the local stock exchange is subject to a percentage tax on the sales of
shares, in lieu of any kind of income tax.
B Yes, He is liable for a final income tax of 5% on first P100,000 net capital gain, and 10% for
any amount in excess of P100,000 net capital gain (Sec.24[C] NIRC).
43. Pedro Manalo, a Filipino citizen residing in Makati City, owns a vacation house and lot in
San Francisco, California, U.S.A, which he acquired in 2000 for P15 million. On January 10,
2006, he sold said real property to Juan Mayaman, another Filipino citizen residing in
Quezon City, for P20 million. On February 9, 2006, Manalo filed the capital gains tax return
and paid P1.2 million representing 6% capital gains tax. Since Manalo did not derive any
ordinary income, no income tax return was filed by him for 2006. After the tax audit
conducted in 2007, the BIR officer assessed Manalo for deficiency income tax computed as
follows:
P5 million (P20 million less P15 million) x 35% = P1.75 million, without the capital gains tax
paid being allowed as tax credit. Manalo consulted a real estate broker who said that the
P1.2 million capital gains tax should be credited from the P1.75 million deficiency income
tax.
a) Is the BIR officer’s tax assessment correct? Explain.
b) If you were hired by Manalo as his tax consultant, what advice would you give him to
protect his interest? Explain. (2008 Bar)
a. The BIR officer correctly disallowed the credit of the final tax of P1.2 million against the
net income tax, which is subject to deductions. However, the assessment of 35% is
incorrectly imposed. The correct rate is based on the 5-32% tax scale which is applicable to
individuals (Sec.24[D1] and Sec. 42[A5] NIRC).
b. I would advise him to demand the application of the 5-32% tax scale instead of the fixed
rate of 35% which applies only to domestic corporations (Sec. 24[D1] NIRC).
44. In 2007, spouses Renato and Judy Garcia opened peso and dollar deposits at
the Philippine branch of the Hong Kong Bank in Manila. Renato is an overseas worker in
Hong Kong while Judy lives and works in Manila. During the year, the bank paid interest
income of P10,000 on the peso deposit and US$1,000 on the dollar deposit. The bank
withheld final income tax equivalent to 20% of the entire interest income and remitted the
same to the BIR.
a) Are the interest incomes on the bank deposits of spouses Renato and Judy Garcia subject
to income tax? Explain.
b) Is the bank correct in withholding the 20% final tax on the entire interest income? Explain.
(2008 Bar)
a) The interest income of Renato, who is a non-resident, is exempt from income tax under
Sec. 27(D3)(2) NIRC. Any bank interest of non-residents from an expanded foreign currency
deposit system is exempt from income tax (Sec. 24[B1] NIRC). An expanded foreign currency
deposit refers to any bank authorized by the Central Bank to transact business in local and
acceptable foreign currencies. Judy Garcia, who is a resident of the Philippines, is liable for
7.5% final income tax on interest income (Sec. 24[B1] NIRC).
b) No, The bank should withhold only 7.5% on the final interest income of the wife. The
husband is exempt.
45. What is the “all events test”? Explain briefly. (2010 Bar)
The “all events test” is a test applied in the realization of income and expense by an accrual-
basis taxpayer. The test requires (1) the fixing of a right to the income or liability to pay; and
(2) the availability of reasonably accurate determination of such income or liability, to
warrant the inclusion of the income or expense in the gross income or deductions during
the taxable year. (CIR v. Isabela Cultural Corporation, G.R. No. 172231, Feb. 12, 2007)
46. What is the immediacy Test? Explain briefly. (2010 Bar)
The “immediacy test” is applied to determine whether the accumulation of after tax profits
by a domestic or resident foreign corporation is really for the reasonable needs of the
business. Under this test, the reasonable needs of the business are construed to mean the
immediate needs of the business, including reasonably anticipated needs. The corporation
should be able to prove an immediate need for the accumulation of earnings and profits, or
the direct correlation of anticipated needs to such accumulation of profits to justify the said
accumulation (Sec 3, RR No. 2-2001; Mertens, Law of Federal Income Taxation, Vol. 7,
Chapter 39, p. 103, cited in Manila Wine Merchants, Inc. v. CIR, G.R. No. L-26145, Feb. 20,
1984)
47. What is the “rational basis test”? Explain briefly (2010 Bar)
The “rational basis test” is applied to gauge the constitutionality of an assailed law in the
face of an equal protection challenge. It has been held that “in areas of social and economic
policy, a statutory classification that neither proceeds along suspect lines nor infringes
 constitutional rights must be upheld against equal protection challenge if there is any
reasonably conceivable state of facts that could provide a rational basis for the
classification.” Under the rational basis test, it is sufficient that the legislative classification
is rationally related to achieving some legitimate State interest (British American Tobacco v.
Camacho and Parayno, G.R. No. 163583, April 5, 2009).
48. Mirador, Inc., a domestic corporation, filed its Annual Income Tax Return for its taxable
year 2008 on April 15, 2009. In the Return, it reflected an income tax overpayment of
P1,000,000.00 and indicated its choice to carry-over the overpayment as an automatic tax
credit against its income tax liabilities in subsequent years. On April 15, 2010, it filed its
Annual Income Tax Return for its taxable year 2009 reflecting a taxable loss and an income
tax overpayment for the current year 2009 in the amount of P500,000.00 and its income
tax overpayment for the prior year 2008 of P1,000,000.00. In its 2009 Return, the
corporation indicated its option to claim for refund the total income tax overpayment of
P1,500,000.00
Choose which of the following statements is correct.
A. Mirador, Inc. may claim as refund the total income tax overpayment of P1,500,000.00
reflected in its income tax return for its taxable year 2009;
B. It may claim as refund the amount of P500,000.00 representing its income tax
overpayment for its taxable year 2009; or
C. No amount may be claimed as refund. Explain the basis of your answer. (2010 Bar)
b. It may claim as refund the amount of P500,000.00 representing its income tax
overpayment for its taxable year 2009;
It may claim as refund the amount of P500,000 representing its income tax overpayment
for its taxable year 2009. Since the taxpayer has opted to carry-over the P1 million overpaid
income tax for taxable year 2008, said option is considered irrevocable and no application
for cash refund shall be allowed for it (Sec 76, NIRC; CIR v. Bank of Philippine Island, G.R. No.
178490, July 7, 2009).
49. A is a travelling salesman working full time for Nu Skin Products. He receives a
monthly salary plus 3% commission on his sales in a Southern province where he is based.
He regularly uses his own car to maximize his visits even to far flung areas. One fine day a
group of militants seized his car. He was notified the following day by the police that the
marines and the militants had a bloody encounter and his car was completely destroyed
after a grenade hit it. A wants to file a claim for casualty loss. Explain the legal basis of your
tax advice. (2010 Bar)
A is not entitled to claim a casualty loss because all of his income partake the nature of
compensation income. Taxpayers earning compensation income arising from personal
services under an employee-employer relationship are not allowed to claim deduction
except that allowed under Sec 34(M) referring only to the P2,400 health and/or
hospitalization insurance premium; perforce the claim of casualty loss has no legal basis (Sec
34, NIRC).
50. In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.-based
corporation which owns a chain of Filipino restaurants in the West Coast, U.S.A. The
dividend remitted to Caruso is subject to U.S. withholding tax with respect to a non-resident
alien like Caruso.
A. What will be your advice to Caruso in order to lessen the impact of possible double
taxation on the same income?
B. Would your answer in A. be the same if Caruso became a U.S. immigrant in 2008 and had
become a non-resident Filipino citizen? Explain the difference in treatment for Philippine
income tax purposes. (2010 Bar)
A) Caruso has the option either to claim the amount of income tax withheld in U.S. as
deduction from his gross income in the Philippines, or to claim it as a tax credit (Sec 34 (C
)(1)(b), NIRC).
51. ABC, a domestic corporation, entered into a software license agreement with XYZ, a
non-resident foreign corporation based in the U.S. Under the agreement which the parties
forged in the U.S., XYZ granted ABC the right to use a computer system program and to avail
of technical know-how relative to such program. In consideration for such rights, ABC
agreed to pay 5% of the revenues it receives from customers who will use and apply the
program in the Philippines. Discuss the tax implication of the transaction. (2010 Bar)
The amount payable under the agreement is in the nature of royalty. The term royalty is
broad enough to include compensation for the use of an intellectual property and supply of
technical know-how as a means of enabling application or enjoyment of any such property
or right (Sec 42(4), NIRC). The royalties paid to the non-resident U.S. corporation, equivalent
to 5% of the revenues derived by ABC for the use of the program in the Philippines, is subject
to a 30% final withholding tax, unless a lower tax rate is prescribed under an existing tax
treaty. (Sec 28(B)(1), NIRC).
52. True or False. (1% each)
A) Gains realized by the investor upon redemption of shares of stock in a mutual fund
company are exempt from income tax.
B) A corporation can claim the optional standard deduction equivalent to 40% of its gross
sales or receipts, as the case may be.
C) Premium payment for health insurance of an individual who is an employee in an amount
of P2,500 per year may be deducted from gross income if his gross salary per year is not
more than P250,000.
D) The Tax Code allows an individual taxpayer to pay in two equal installments, the first
installment to be paid at the time the return is filed, and the second on or before July 15 of
the same year, if his tax due exceeds P2,000.
E) An individual taxpayer can adopt either the calendar or fiscal period for purposes of filing
his income tax return.
F) The capitalization rules may be resorted to by the BIR in order to compel corporate
taxpayers to declare dividends to their stockholders regularly.
G) Informer’s reward is subject to a final withholding tax of 10%.
H) A non-resident alien who stays in the Philippines for less than 180 days during the
calendar year shall be entitled to personal exemption not to exceed the amount allowed to
citizens of the Philippines by the country of which he is subject or citizen. (2010 Bar)
53. Z is a Filipino immigrant living in the United States for more than 10 years. He is retired
and he came back to the Philippines as a balikbayan. Every time he comes to the Philippines,
he stays here for about a month. He regularly receives a pension from his former employer
in the United States, amounting to US$1, 000 a month. While in the Philippines, with his
pension pay from his former employer, he purchased three condominium units in Makati
which he is renting out for P15, 000 a moth each.
a. Does the US$1, 000 pension become taxable because he is now residing in the
Philippines? Reason briefly.
b. Is his purchase of the three condominium units subject to any tax? Reason
briefly. (2007 Bar)
SUGGESTED ANSWER: The pension is not taxable. The law provides that pensions received
by resident or nonresident citizens of the Philippines from foreign governments agencies
and other institutions, private or public, are excluded from gross income. (Section 32
(B)(6)(c), NIRC).
ALTERNATIVE ANSWER: Z is still considered as a nonresident Filipino citizen who is subject
to tax only on income derived from the Philippine sources. (Section 23, NIRC). His pension
from U.S. is an income from without being in the nature of compensation for past services
rendered outside the Philippines. (Section 42, NIRC). Accordingly, the pension is not subject
to the Philippine income tax.
54. Antonia Santos, 30 years old, gainfully employed, is the sister of Edgardo Santos. She
died in an airplane crash. Edgardo is a lawyer and he negotiated with the airline company
and insurance company and they were able to a agree total settlement of P10 Million. This
is what Antonia would have earned as somebody who was gainfully employed. Edgardo was
her only heir.
a. Is the P10 Million subject to estate tax? Reason briefly.
b. Should Edgardo report the P10 Million as his income being Antonia’s only heir?
Reason briefly. (2007 Bar)
SUGGESTED ANSWER: The P10M should not be reported by Edgardo as his income. The
amount received in a settlement agreement with the airline company and insurance
company is an amount received from the accident insurance company is an amount
received from the accident insurance covering the passengers of the airline company and is
in the nature of compensation for personal injuries and for damages sustained on a account
 of such injuries, which is excluded from the gross income of the recipient. (Section 32(B)(4),
NIRC).
ALTERNATIVE ANSWER:
No. The P10M having been received for the loss of life, is compensatory in nature, hence, is
not considered as an income but a mere return of capital. Income is any wealth which flows
to the taxpayer other than a mere return of capital. (Madrigal v. Rafferty 38 Phil. 414
[1918]).
55. Nutrition Chippy Corporation gives all its employees (rank and file, supervisors and
managers) one sack of rice every month valued at P800 per sack. During an audit
investigation made by the Bureau of Internal Revenue (BIR), the BIR assessed the company
for failure to withhold the corresponding withholding tax on the amount equivalent to the
one sack of rice received by all the employees, contending that the sack of rice is considered
as additional compensation for the rank and file employees and additional fringe benefit for
the supervisions and managers. Therefore, the value of the one sack of rice every month
should be considered as part of the compensation of the rank and file subject to tax. For the
supervisors and managers, the employer should be the one assessed pursuant to Section
33 (a) of the NIRC. Is there a legal basis for the assessment made by the BIR? Explain your
answer. (2007 Bar)
There is no legal basis for the assessment. The one sack of rice given to the supervisors and
managers are considered de minimis fringe benefits considering that the value per sack does
not exceed P1,000, hence exempted from the fringe benefits tax. (Section 33, NIRC as
implemented by RR No. 10-2000).
The one sack of rice per month given to the rank and file employees is, likewise, not subject
to tax as part of compensation income. This is a benefit of relatively small value intended to
promote the health, goodwill, contentment and efficiency of the employee which will not
constitute taxable income of the recipient. (Section 2.78.1 (A)(3) of RR No. 2-98).
56. Weber Realty Company which owns a three-hectare land in Antipolo entered into a
Joint Venture Agreement (JVA) with Prime Development Company for the development
of said parcel of land. Weber Realty as owner of the land contributed the land to the Joint
Venture and Prime Development agreed to develop the same into a residential subdivision
and construct residential houses thereon. They agreed that they would divide the lots
between them.
a. Does the JVA entered into by and between Weber and Prime create a separate
taxable entity? Explain briefly.
b. Are the allocation and distribution of the saleable lots to Weber and prime
subject to income tax and to expanded withholding tax? Explain briefly.
c. Is the sale by Weber or Prime of their respective shares in the saleable lots to
third parties subject to income tax and to expanded withholding tax? Explain briefly. (2007
Bar)
a) The JVA entered into between Weber and Prime does not create a separate taxable
entity. The joint venture is formed for the purpose of undertaking construction projects;
hence, is not considered as a corporation for income tax purposes. (Section 22 (B), NIRC).
b) No. The allocation and distribution of the saleable lots to Weber and Prime is a mere
return of their capital contribution. The income tax and the expanded withholding tax is not
due on a capital transaction because no income is realized from it. (BIR Ruling No. DA-192-
2001, October 17, 2011).
c) Yes. The sale by Weber and Prime of their respective shares to third parties is a closed
and completed transaction resulting in the realization of income, subject to income tax and
to the expanded withholding tax. (BIR Ruling DA-228-2006).
57. Noel Santos is a very bright computer science graduate. He was hired by Hewlett
Packard. To entice him to accept the offer for employment, he was offered the arrangement
that part of is compensation would be an insurance policy with a face value of P20 Million.
The parents of Noel are made the beneficiaries of the insurance policy.
a. Will the proceeds of the insurance form part of the income of the parents of
Noel and be subject to income tax? Reason briefly.
b. Can the company deduct from its gross income the amount of the premium?
Briefly. (2007 Bar)
a) No. The proceeds of life insurance policies paid to the heirs of beneficiaries upon the
death of the insured are not included as part of the gross income of the recipient. (Section
32 (B)(1), NIRC). There is no income realized because nothing flows to Noel’s parents other
than a mere return of capital, the capital being the life of the insured.
b) Yes. The premiums paid are ordinary and necessary business expenses of the company.
They are allowed a deduction from gross income so long as the employer is not a direct or
indirect beneficiary under the policy of insurance. (Section 36 (A)(4), NIRC). Since the
parents of the employee were made the beneficiaries, the prohibition for their deduction
does not exist.
58. Charlie, a widower, has two sons by his previous marriage. Charlie lives with Jane who
is legally married to Mario. They have a child named Jill. The children are all minors and not
gainfully employed.
1. How much personal exemption can Charlie claim? Explain.
2. How much additional exemption can Charlie claim? Explain. (2006 Bar)
59. Gold and Silver Corporation gave extra 14th month bonus to all its officials and
employees in the total amount of P75 Million. When it filed its corporate income tax return
the following year, the corporation declared a net operating loss. When the income tax
return of the corporation was reviewed by the BIR the following year, it disallowed as item
of deduction the P75 Million bonus the corporation gave its officials and employees on the
ground of unreasonableness. The corporation claimed that the bonus is an ordinary and
necessary expense that should be allowed. If you were the BIR Commissioner, how will you
resolve the issue? (2006 Bar)
I will rule against the deductibility of the bonus. The extra bonus is not normal to the
business and unreasonable. Giving an extra bonus at a time that the company suffers
operating losses is not a payment done in good faith and is not normal to the business,
hence unreasonable and would not qualify as ordinary and necessary expense.
60. X, while driving home from his office, was seriously injured when a bus Driven by a
reckless driver bumped from behind his automobile. As a result, he had to pay P200,000.00
to his doctor and P100,000.00 to the hospital where he was confined for treatment. He
filed a suit against the bus driver and the bus company and was awarded and paid actual
damages of P300,000.00 (for his doctor and hospitalization bills), P200,000.00 by way of
moral damages, and P50,000.00 for what he had to pay his attorney for bringing his case to
court.
Which, if any, of the forgoing awards are taxable income to X and which are not? Explain.
(2005 Bar)
61. A, a doctor by profession, sold in the year 2000 a parcel of land which he bought as a
form of investment in 1990 for P1Million. The land was sold to B, his colleague at a time
when the real estate prices had gone down and so the land was sold only for P800,000.00,
which was then the fair market value of the land. He used the proceeds to finance his trip
to the United States. He claims that he should not be made to pay the 6% final tax because
he did not have any actual gain on the sale. Is his contention correct? Why? (2001 Bar)
NO. The 6% capital gains tax on sale of a real property held as capital asset is imposed on
the income presumed to have been realized from the sale which is the fair market value or
selling price thereof, whichever is higher (NIRC, Sec. 24 [D]). Actual gain is not required for
the imposition of the tax but it is the gain by fiction of law which is taxable.
62. Explain briefly whether gain on sale of a car used for personal purpose is taxable on
non-taxable. (2005 Bar)
Taxable. Since the car is used for personal purposes, it is considered as a capital asset hence
the gain is considered income (NIRC, Sec. 32 A [3] and Sec. 39 A [1]).
63. Explain Briefly whether gain arising from expropriation of property is taxable or non-
taxable.
Taxable. Sale, exchange or other disposition of property to the government of real property
is taxable. It includes taking by the government through condemnation proceedings
(Gonzales v. CTA, G.R. No. L-14532, May 26, 1965).
64. Three brothers inherited in 1992 a parcel of land valued for real estate tax purposes at
P3.0Million, which they held in co-ownership. In 1995, they transferred the property to a
newly organized corporation as to their equity, which was placed at the zonal value of P6.0
Million. In exchange for the property, the three brothers thus each received shares of stock
of the corporation with a total par value of P2.0 Million or, together, a total of P6.0 Million.
No business was done by the corporation and the property remained idle, In the early part
of 1997, one of the brothers, was in dire need of funds, sold his shares to the two brothers
for P2.0 Million.
Is the transaction subject to any internal revenue tax other than the documentary stamp
tax? (1997 Bar)
65. An insolvent company had an outstanding obligation of P100,000.00 from a creditor.
Since it could not pay the debt, the creditor agreed to accept payment through dacion en
pago a property, which had a market value of P30,000.00. In the dacion en pago document,
the balance of the debt was condoned.
a) What is the tax effect of the discharge of the unpaid balance of the obligation on the
debtor corporation?
b) Insofar as the creditor is concerned, how is he affected taxwise as a consequence of the
transaction? (1997 Bar)
66. Explain briefly whether recovery of bad debts previously charged off is taxable or non-
taxable. (2005 Bar)
The recovery of bad debts previously allowed as deduction in the preceding year or years
shall be included as part of the taxpayer’s gross income in the year of such recovery to the
extent of the income tax benefit of said deduction.
If the taxpayer did not benefit from deduction of the bad debt written-off because it did not
result in any reduction of his income tax in the year of such deduction as in the case where
the result of the taxpayer’s business operation was a net loss even without deduction of the
bad debts written-off, his subsequent recovery thereof shall be treated as a mere recovery
or a return of capital, hence, not treated as receipt of realized taxable income.
67. What is meant by “tax benefit rule”? Give an illustration of the application of the tax
benefit rule. (2003 Bar)
“Tax benefit rule” refers to the principle that if a taxpayer recovers a loss or expense that
was deducted in a previous year, the recovery must be included in the current year’s gross
income to the extent that it was previously deducted (Black, 2004).
68. Distinguish a capital asset from an ordinary asset. (2003 Bar)
“Capital assets” includes property held by the taxpayer whether or not connected with his
trade or business, but the term does not include any of the following, which are
consequently considered “ordinary assets”:
1. stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the close of
the taxable year;
2. property held by the taxpayer primarily for sale to customers in the ordinary
course of trade or business;
3. property used in the trade or business of a character which is subject to the
allowance for depreciation provided in Sec. 34 (F) of the NIRC; or
4. real property used in trade or business of the taxpayer.
69. What is the rationale for the rule prohibiting the deduction of capital losses from
ordinary gains? Explain. (2003 Bar)
It is to insure that only costs or expenses incurred in earning the income shall be deductible
for income tax purposes consonant with the requirement of the law that only necessary
expenses are allowed as deductions from gross income. The term “necessary expenses”
presupposes that in order to be allowed as deduction, the expense must be business
connected, which is not the case insofar as capital losses are concerned. This is also the
reason why all nonbusiness connected expenses like personal, living and family expenses,
are not allowed as deduction from gross income (Section 36(A)(1) of the 1997 NIRC).
70. State with reasons the tax treatment of income realized from sale of (i) capital assets;
and (ii) ordinary assets in the preparation of annual income tax returns. (2005 Bar)
71. Mr. Sebastian is a Filipino seaman employed by a Norwegian company, which is engaged
exclusively in international shipping. He and his wife, who manages their business, filed a
joint income tax return, the BIR issued on April 20, 2001 a deficiency income tax assessment
for the sum of P250,000.00, inclusive of interest and penalty. For failure of Mr. and Mrs.
Sebastian to pay the tax within the period stated in the notice of assessment, the BIR issued
on August 19, 2001 warrants of distraint and levy to enforce collection of the tax.
What is the rule of income taxation with respect to Mr. Sebastian’s income in 1997 as a
seaman on board the Norwegian vessel engaged in international shipping? Explain your
answer. (2002 Bar)
72. Mr. Santos died intestate in 1989, leaving his spouse and five children as the only heirs.
The estate consisted of a family home and a four-door apartment, which was being rented
to tenants. Within the year, an extrajudicial settlement of the estate was executed among
the heirs, each of them receiving his/her due share. The surviving spouse assumed
administration of the property. Each year the net income from the rental of the property
was distributed to all, proportionately, on which they paid, respectively the corresponding
income tax. In 1994, the income tax returns of the heirs were examined and deficiency
income tax assessments were issued against each of them for the years 1989 to 1993 as
having entered into unregistered partnership. Were the assessments justified? (1997 Bar)
73. Distinguish Allowable Deduction from Personal Exemptions. Give example of an
allowable deduction and another example for personal exemption. (2001 Bar)
74. OXY is the president and chief executive officer of ADD Computers, Inc. When OXY was
asked to join the government service as director of the bureau under the Department of
Trade and Industry, he took a leave of absence from ADD. Believing that its business
outlook, goodwill and opportunities improved with OXY in the government, ADD proposed
to obtain a policy of insurance on his life. On ethical grounds, OXY objected to the insurance
purchase but ADD purchased the policy anyway. Its annual premium amounted to
P100,000.00. Is said premium deductible by ADD Computers, Inc.? Reason. (2004 Bar)
NO. The premium is not deductible because it is not an ordinary business expense. The term
"ordinary" is used in the income tax law in its common significance and it has the
connotation of being normal, usual or customary (Deputy v. Du Pont, 308 US 488 [1940]).
Paying premiums for the insurance of a person not connected to the company is not normal,
usual or customary. Another reason for its non-deductibility is the fact that it can be
considered as an illegal compensation made to a government employee. This is so because
if the insured, his estate or heirs were made as the beneficiary (because of the requirement
of insurable interest), the payment of premium will constitute bribes which are not allowed
as deduction from gross income (Sec. 34[A][1][c], NIRC).
Even if the company was made the beneficiary, whether directly or indirectly, the premium
is not allowed as a deduction from gross income (Sec. 36[A}14], NIRC).
75. X is the manager of Mang Douglas Hamburger Inc. X had dinner with Y, owner of a chain
of restaurants to convince the latter to carry Mang Douglas hamburgers. After Y agreed,
both went their separate ways. X celebrated by going to a single’s bar. He picked up a
partner and consumed a bottle of beer. He drove home at 3:00 a.m. On his way home, he
sideswiped a pedestrian, who died as a result of the accident. X amicably settled the case
by paying the heirs of the pedestrian. The money, however, came from Mang Douglas
Hamburger, Inc. Discuss whether the reward, given to the heir can be claimed by Mang
Douglas hamburger, Inc. as an expense deductible in its Income Tax Return. (1993 Bar)
76. PQR Corp. claimed as a deduction in its tax returns the amount of P1,000,000 as bad
debts. The corporation was assessed by the Commissioner of Internal Revenue for
deficiency taxes on the ground that the debts cannot be considered as “worthless,” hence
they do not qualify as bad debts. The company asks for your advice on “What factors will
help in determining whether or not the debts are bad debts?” Answer and explain briefly.
(2004 Bar)