Tax Law

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TABLE OF CONTENTS
I. General Principles of Taxation…………………………………………………………………………………………………….1
A.
B.
C.
D.

Definition and concept of taxation………………………………………………………………………………………………………………………....1
Nature of taxation…………………………………………………………………………………………………………............................................1
Characteristics of taxation…………………………………………………………………………………………………………..............................2
Power of taxation compared with other powers ……………………………………………………………………..…….……..…....3
1. Police power…………………………………………………………………………………………………………..............................................3
2. Power of eminent domain…………………………………………………………………………………………………………………………………3
E. Purpose of taxation…………………………………………………………………………………………………………..........................................3
3. Revenue-raising…………………………………………………………………………………………………………........................................3
4. Non-revenue/special or regulatory………………………………………………………………………………………………………….........3
F. Principles of sound tax system………………………………………………………………………………………………………….......................3
1. Fiscal adequacy………………………………………………………………………………………………………….........................................3
2. Administrative feasibility………………………………………………………………………………………………………….........................3
3. Theoretical justice………………………………………………………………………………………………………….....................................4
G. Theory and basis of taxation…………………………………………………………………………………………………………...........................4
1. Lifeblood theory…………………………………………………………………………………………………………........................................4
2. Necessity theory ………………………………………………………………………………………………………….......................................4
3. Benefits-protection theory (Symbiotic relationship) ……………………………………………………………………………………..4
4. Jurisdiction over subject and objects……………………………………………………………………………………………………………….4
H. Doctrines in taxation………………………………………………………………………………………………………….......................................4
1. Prospectivity of tax laws…………………………………………………………………………………………………………...........................4
2. Imprescriptibility…………………………………………………………………………………………………………......................................4
3. Double taxation………………………………………………………………………………………………………….........................................4
4. Escape from taxation…………………………………………………………………………………………………………................................6
5. Exemption from taxation………………………………………………………………………………………………………..…........................9
6. Compensation and set-off………………………………………………………………………………………………………..….......................9
7. Compromise…………………………………………………………………………………………………………............................................12
8. Tax amnesty…………………………………………………………………………………………………………............................................12
9. Construction and interpretation…………………………………………………………………………………………………………............12
I. Scope and limitation of taxation…………………………………………………………………………………………………………...................14
1. Inherent limitations…………………………………………………………………………………………………………................................14
2. Constitutional limitations………………………………………………………………………………………………………….......................19
J. Stages of taxation…………………………………………………………………………………………………………...........................................32
1. Levy…………………………………………………………………………………………………………..........................................................32
2. Assessment and collection………………………………………………………………………………………………………….....................32
3. Payment…………………………………………………………………………………………………………...................................................33
4. Refund…………………………………………………………………………………………………………......................................................33
K. Definition, nature, and characteristics of taxes……………………………………………………………………………………………………….33
L. Requisites of a valid tax…………………………………………………………………………………………………………...................................33
M. Tax as distinguished from other forms of exactions ……………………………………………………………………………………………….33
N. Kinds of taxes…………………………………………………………………………………………………………..................................................33

II. National Internal Revenue Code (NIRC) of 1997, as amended
A. Income taxation………………………………………………………………………………………………………….............................................34
1. Income tax systems………………………………………………………………………………………………………….................................34
2. Features of the Philippine income tax law……………………………………………………………………………………………………..36
i

3. Criteria in imposing Philippine income tax……………………………………………………………………………………………………36
4. Types of Philippine income tax…………………………………………………………………………………………………………..............38
5. Taxable period………………………………………………………………………………………………………….........................................39
6. Kinds of taxpayers…………………………………………………………………………………………………………...................................39
7. Income taxation………………………………………………………………………………………………………….......................................42
8. Income………………………………………………………………………………………………………….....................................................43
9. Gross income…………………………………………………………………………………………………………...........................................46
10. Taxation of resident citizens, non-resident citizens, and resident aliens………………………………………………….106
11. Taxation of non-resident aliens engaged in trade or business…………………………………………………………………..119
12. Individual taxpayers exempt from income tax……………………………………………………………………………………………120
13. Taxation of domestic corporations………………………………………………………………………………………………………….....120
14. Taxation of resident foreign corporations………………………………………………………………………………………………….126
15. Taxation of non-resident foreign corporations…………………………………………………………………………………………..127
16. Improperly accumulated earnings of corporations……………………………………………………………………………………127
17. Exemption from tax on corporations ………………………………………………………………………………………………………….127
18. Taxation of partnerships………………………………………………………………………………………………………….....................127
19. Taxation of general professional partnerships…………………………………………………………………………………………..127
20. Withholding tax…………………………………………………………………………………………………………....................................127
B. Estate tax…………………………………………………………………………………………………………......................................................133
1. Basic principles…………………………………………………………………………………………………………....................................133
2. Definition………………………………………………………………………………………………………….............................................133
3. Nature…………………………………………………………………………………………………………...................................................133
4. Purpose or object…………………………………………………………………………………………………………................................133
5. Time and transfer of properties………………………………………………………………………………………………………….........133
6. Classification of decedent…………………………………………………………………………………………………………...................134
7. Gross estate vis-à-vis net estate…………………………………………………………………………………………………………..........134
8. Determination of gross estate and net estate…………………………………………………………………………………………….134
9. Composition of gross estate…………………………………………………………………………………………………………................136
10. Items to be included in gross estate…………………………………………………………………………………………………………..137
11. Deductions from estate…………………………………………………………………………………………………………......................138
12. Exclusions from estate………………………………………………………………………………………………………….......................141
13. Tax credit for estate taxes paid in a foreign country…………………………………………………………………………………141
14. Exemption of certain acquisitions and transmissions………………………………………………………………………………141
15. Filing of notice of death………………………………………………………………………………………………………….....................141
16. Estate tax return………………………………………………………………………………………………………….................................141
C. Donor’s tax…………………………………………………………………………………………………………...................................................144
1. Basic principles…………………………………………………………………………………………………………....................................144
2. Definition………………………………………………………………………………………………………….............................................144
3. Nature…………………………………………………………………………………………………………...................................................144
4. Purpose or object…………………………………………………………………………………………………………................................144
5. Requisites of valid donation…………………………………………………………………………………………………………...............144
6. Transfers which may be constituted as donation………………………………………………………………………………………144
7. Transfer for less than adequate and full consideration……………………………………………………………………………..146
8. Classification of donor………………………………………………………………………………………………………….........................147
9. Determination of gross gift………………………………………………………………………………………………………….................147
10. Composition of gross gift…………………………………………………………………………………………………………...................147
11. Valuation of gifts made in property ………………………………………………………………………………………………………….148
12. Tax credit for donor’s taxes paid in a foreign country………………………………………………………………………………149
13. Exemptions of gifts from donor’s tax…………………………………………………………………………………………………………149
14. Person liable………………………………………………………………………………………………………….......................................151
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15. Tax basis………………………………………………………………………………………………………….............................................151
D. Value-Added Tax (VAT) …………………………………………………………………………………………………………..............................153
1. Concept…………………………………………………………………………………………………………...............................................153
2. Characteristics/Elements of a VAT-Taxable transaction………………………………………………………………………….153
3. Impact of tax………………………………………………………………………………………………………….......................................154
4. Incidence of tax…………………………………………………………………………………………………………..................................154
5. Tax credit method…………………………………………………………………………………………………………..............................154
6. Destination principle………………………………………………………………………………………………………….........................154
7. Persons liable………………………………………………………………………………………………………….....................................154
8. VAT on sale of goods or properties…………………………………………………………………………………………………………..155
9. Zero-rated and effectively zero-rated sales of goods or properties ……………………………………………………….156
10. Transactions deemed sale…………………………………………………………………………………………………………................156
11. Change or cessation of status as VAT-registered person………………………………………………………………………..157
12. VAT on importation of goods…………………………………………………………………………………………………………...........157
13. VAT on sale of service and use or lease of properties……………………………………………………………………………..158
14. Zero-rated sale of services…………………………………………………………………………………………………………...............159
15. VAT exempt transactions………………………………………………………………………………………………………….................159
16. Input tax and output tax, defined…………………………………………………………………………………………………………....161
17. Sources of input tax…………………………………………………………………………………………………………..........................161
18. Persons who can avail of input tax credit………………………………………………………………………………………………..161
19. Determination of output/input tax; VAT payable; excess input tax credits……………………………………………161
20. Substantiation of input tax credits…………………………………………………………………………………………………………..161
21. Refund or tax credit of excess input tax…………………………………………………………………………………………………..161
22. Invoicing requirements…………………………………………………………………………………………………………....................161
23. Filing of return and payment…………………………………………………………………………………………………………...........161
24. Withholding of final VAT on sales to government ………………………………………………………………………………..161
E. Tax remedies under the NIRC…………………………………………………………………………………………………………........................161
1. Taxpayer’s remedies…………………………………………………………………………………………………………..........................161
2. Government remedies………………………………………………………………………………………………………….......................192
3. Statutory offenses and penalties………………………………………………………………………………………………………….......193
4. Compromise and abatement of taxes………………………………………………………………………………………………………..194
F. Organization and Function of the Bureau of Internal Revenue………………………………………………………………………………196
1. Rule-making authority of the Secretary of Finance…………………………………………………………………………………….196
2. Power of the Commissioner to suspend the business operation of a taxpayer…………………………………………..197

III. Local Government Code of 1991, as amended………………………………………………………………………197
A. Local government taxation…………………………………………………………………………………………………………...........................197
1. Fundamental principles………………………………………………………………………………………………………….....................197
2. Nature and source of taxing power……………………………………………………………………………………………………………197
3. Local taxing authority…………………………………………………………………………………………………………........................199
4. Scope of taxing power………………………………………………………………………………………………………….......................200
5. Specific taxing power of Local Government Units………………………………………………………………………………………200
6. Common limitations on the taxing powers of LGUs……………………………………………………………………………………203
7. Collection of business tax…………………………………………………………………………………………………………..................204
8. Taxpayer’s remedies…………………………………………………………………………………………………………..........................205
1. Judicial………………………………………………………………………………………………………….........................................205
2. Administrative………………………………………………………………………………………………………….............................205
9. Civil remedies by the LGU for collection of revenues……………………………………………………………………………206
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B. Real property taxation…………………………………………………………………………………………………………..................................207
1. Fundamental principles………………………………………………………………………………………………………….....................207
2. Nature of real property tax…………………………………………………………………………………………………………................207
3. Imposition of real property tax…………………………………………………………………………………………………………..........207
4. Appraisal and assessment of real property tax…………………………………………………………………………………………..212
5. Collection of real property tax…………………………………………………………………………………………………………...........214
6. Refund or credit of real property tax………………………………………………………………………………………………………….215
7. Taxpayer’s remedies…………………………………………………………………………………………………………..........................216

IV. Tariff and Customs Code of 1978, as amended………………………………………………………………………217
A. Tariff and duties, defined…………………………………………………………………………………………………………..............................217
B. General rule: all imported articles are subject to duty. …………………………………………………………………………………………217
1. Importation by the government taxable…………………………………………………………………………………………………….217
C. Purpose for imposition…………………………………………………………………………………………………………..................................217
D. Flexible tariff clause…………………………………………………………………………………………………………......................................217
E. Requirements of importation………………………………………………………………………………………………………….......................218
1. Beginning and ending of importation…………………………………………………………………………………………………………218
2. Obligations of importer………………………………………………………………………………………………………….....................218
F. Importation in violation of tax credit certificate……………………………………………………………………………………………………219
1. Smuggling…………………………………………………………………………………………………………...........................................219
2. Other fraudulent practices…………………………………………………………………………………………………………................219
G. Classification of goods…………………………………………………………………………………………………………...................................219
1. Taxable importation…………………………………………………………………………………………………………...........................219
2. Prohibited importation…………………………………………………………………………………………………………......................220
3. Conditionally-free importation…………………………………………………………………………………………………………..........220
H. Classification of duties…………………………………………………………………………………………………………..................................221
1. Ordinary/regular duties………………………………………………………………………………………………………….....................221
2. Special duties………………………………………………………………………………………………………….....................................221
I. Remedies………………………………………………………………………………………………………….......................................................223
1. Government………………………………………………………………………………………………………….......................................223
2. Taxpayer…………………………………………………………………………………………………………............................................229

V. Judicial Remedies (R.A. No. 1125, as amended, and the Revised Rules of the CTA)…………………231
1. Jurisdiction of the Court of Tax Appeals…………………………………………………………………………………………………………........231
2. Judicial procedures…………………………………………………………………………………………………………........................................235
3. Taxpayer’s suit impugning the validity of tax measures or acts of taxing authorities …………………………………………..244

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TAXATION LAW
General Principles of Taxation
A. Definition and concept of taxation
I.

1. Describe the power of taxation. May a legislative body enact laws to raise revenues in the absence of a
constitutional provision granting said body the power of tax? Explain.
SUGGESTED ANSWER:
The power of taxation is inherent in the State being an attribute of sovereignty. As an incident of sovereignty,
the power to tax has been described as unlimited in its range, acknowledging in its very nature no limits, so
that security against its abuse is to be found only in the responsibility of the legislature which imposes the tax
on the constituency who are to pay it. [Mactan Cebu International Airport Authority v. Marcos, 261 SCRA 667,
(1996)].
Being an inherent power, the legislature can enact laws to raise revenues even without the grant of said power
in the Constitution. It must be noted that Constitutional provisions relating to the power of taxation do not
operate as grants of the power of taxation to the Government, but instead merely constitute limitations upon a
power which would otherwise be practically without limit. [Cooley, Constitutional Limitations, 1927 8th Ed., p.
787] (BAR 2005)
B. Nature of taxation
1. Taxes are assessed for the purpose of generating revenue to be used for public needs. Taxation itself is
the power by which the State raises revenue to defray the expenses of government. A jurist said that a
tax is what we pay for civilization.
In our jurisdictions, which of the following statements may be erroneous:
1.
2.
3.
4.
5.

Taxes are pecuniary in nature.
Taxes are enforced charges and contributions.
Taxes are imposed on persons and property within the territorial jurisdiction of a State.
Taxes are levied by the executive branch of the government.
Taxes are assessed according to a reasonable rule of apportionment.

Justify your answer or choice briefly. (5%)
SUGGESTED ANSWER:
4. Taxes are levied by the executive branch of government.
This statement is erroneous because levy refers to the act of imposition by the legislature which is done
through the enactment of a tax law. Levy is an exercise of the power to tax which is exclusively legislative in
nature and character. Clearly, taxes are not levied by the executive branch of government. (NPC v. Albay, 186
SCRA 198 (1990). (BAR 2004)
2. Why is the power to tax considered inherent in a sovereign State?
SUGGESTED ANSWER:
It is considered inherent in a sovereign State because it is a necessary attribute of sovereignty. Without this
power no sovereign State can exist or endure. The power to tax proceeds upon the theory that the existence of
a government is a necessity and this power is an essential and inherent attribute of sovereignty, belonging as a
matter of right to every independent state or government. No sovereign state can continue to exist without the
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means to pay its expenses; and that for those means, it has the right to compel all citizens and property within
its limits to contribute, hence, the emergence of the power to tax. (51 Am. Jur., Taxation 40). (BAR 2003)
3. Justice Holmes once said: “The power to tax is not the power to destroy while this Court (the Supreme
Court) sits." Describe the power to tax and its limitations. (5%)
SUGGESTED ANSWER:
The power to tax is an inherent power of the sovereign which is exercised through the legislature, to impose
burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the
legitimate objects of government. The underlying basis for its exercise is governmental necessity for without it
no government can exist nor endure. Accordingly, it has the broadest scope of all the powers of government
because in the absence of limitations, it is considered as unlimited, plenary, comprehensive and supreme. The
two limitations on the power of taxation are the inherent and constitutional limitations which are intended to
prevent abuse on the exercise of the otherwise plenary and unlimited power. It is the Court's role to see to it
that the exercise of the power does not transgress these limitations. (BAR 2001)
4. What is the nature of the power of taxation?
ANSWER:
The power to tax is an attribute of sovereignty and is inherent in the State. It is a power emanating from
necessity because it imposes a necessary burden to preserve the State’s sovereignty (PhiL Guarantee Co. vs.
Commissioner, L-22074, April 30, 1965). It is inherently legislative in nature and character in that the power of
taxation can only be exercised through the enactment of law.
ALTERNATIVE ANSWER:
The nature of the power of taxation refers to its own limitations such as the requirement that it should be for a
public purpose that it be legislative, that it is territorial and that it should be subject to international comity.
(BAR 1996)
C. Characteristics of taxation
1. Taxes are assessed for the purpose of generating revenue to be used for public needs. Taxation itself is
the power by which the State raises revenue to defray the expenses of government. A jurist said that a
tax is what we pay for civilization.
In our jurisdictions, which of the following statements may be erroneous?
1.
2.
3.
4.
5.

Taxes are pecuniary in nature.
Taxes are enforced charges and contributions.
Taxes are imposed on persons and property within the territorial jurisdiction of a State.
Taxes are levied by the executive branch of the government.
Taxes are assessed according to a reasonable rule of apportionment.

Justify your answer or choice briefly. (5%)
SUGGESTED ANSWER:
4. Taxes are levied by the executive branch of government.
This statement is erroneous because levy refers to the act of imposition by the legislature which is done
through the enactment of a tax law. Levy is an exercise of the power to tax which is exclusively legislative in
nature and character. Clearly, taxes are not levied by the executive branch of government. (NPC v. Albay, 186
SCRA 198 (1990). (BAR 2004)
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D. Power of taxation compared with other powers
1. Police power
2. Power of eminent domain
E. Purpose of taxation
3. Revenue-raising
4. Non-revenue/special or regulatory
1. The police power, the power to tax and the power of eminent domain are inherent powers of
government. May a tax be validly imposed in the exercise of the police power and not of the power to
tax? If your answer is in the affirmative, give an example.
ANSWER:
The police power may be exercised for the purpose of requiring licenses for which license fees may have to be
paid. The amount of the license fees for the regulation of useful occupations should only be sufficient to pay for
the cost of the license and the necessary expense of police surveillance and regulation. For non-useful
occupations, the license fee may be sufficiently high to discourage the particular activity sought to be
regulated. It is clear from the foregoing that police power may not be exercised by itself alone for the purpose
of raising taxes. However, police power may be exercised jointly with the power of taxation for the purpose of
raising revenues. (Lutz us. Araneta, 98 Phil. 148)
ALTERNATIVE ANSWER:
Taxation involves the power to raise revenue not only in order to support the existence of government but
likewise to carry out legitimate objects of government. Among such legitimate objects are those that police
power itself can cover. As early as the case of Lutz vs. Araneta (98 Phil. 148), the Supreme Court has ruled that
taxation may be used to implement an object of police power. An illustration of such exercise would be an
imposition of taxes on gambling, the rates of which are made somewhat onerous in order to discourage
gambling instead of an outright prohibition thereof by an exercise of a police power measure such as by
present provisions of the Revised Penal Code. (BAR 1991)
2. To provide means for rehabilitation and stabilization of the sugar industry so as to prepare it for the
eventuality of the loss of the quota allocated to the Philippines resulting from the lifting of U.S.
sanctions against an African country. Congress passes a law increasing the existing tax on the
manufacture of sugar on a graduated basis. All collections made under the law are to accrue to a special
fund to be spent only for the purposes enumerated therein, among which are to place the sugar
industry in a position to maintain itself and ultimately to insure its continued existence despite the loss
of that quota, and to afford laborers employed in the industry a living wage and to improve their
working conditions. X, a sugar planter, files a suit questioning the constitutionality of the law alleging
that the tax is not for a public purpose as the same is being levied exclusively for the aid and support of
the sugar industry. Decide the case.
ANSWER:
The suit filed by the sugar planter questioning the constitutionality of the sugar industry stabilization measure
is untenable. Taxation is no longer merely for raising revenue to support the existence of government but the
power may also be exercised to carry out legitimate objects of the government. It is a legitimate object of
government to protect its local industries on which the national economy largely depends. Where the aim of
the tax measure is to achieve such a governmental objective, the tax Imposition can be said to be for a public
purpose (Gaston vs. Republic Bank, 158 SCRA 626). (BAR 1991)
F. Principles of sound tax system
1. Fiscal adequacy
2. Administrative feasibility
1. A law that allows taxes to be paid either in cash or in kind is valid.
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SUGGESTED ANSWER:
True. There is no law which requires the payment of taxes in cash only. However, a law allowing payment of
taxes in kind, although valid, may pose problems of valuation, hence, will violate the principle of administrative
feasibility. (BAR 2009)
Theoretical justice
G. Theory and basis of taxation
1. Lifeblood theory
3.

1. Discuss the meaning and the implications of the following statement:
“Taxes are the lifeblood of government and their prompt and certain availability is an imperious need."
ANSWER:
The phrase, “taxes are the lifeblood of government, etc." expresses the underlying basis of taxation which is
governmental necessity, for indeed, without taxation, a government can neither exists nor endure. Taxation is
the indispensable and inevitable price for civilized society: without taxes, the government would be paralyzed.
This phrase has been used, for instance, to justify the validity of the laws providing for summary remedies in
the collection of taxes. As a consequence of the above rule, an injunction against the assessment and collection
of taxes is generally withheld be the laws imposing such taxes. Even when it is not so, under procedural laws
such an injunction may not be obtained as held in the case of Valley Trading Co. vs. CFI (G.R. No. 49529, 31
March 1989), where the Supreme Court ruled that the damages that may be caused to the taxpayer by being
made to pay the taxes cannot be said to be as irreparable as it would be against the government’s inability to
collect taxes. (BAR 1991)
2.
3.
4.

Necessity theory
Benefits-protection theory (Symbiotic relationship)
Jurisdiction over subject and objects

H. Doctrines in taxation
1. Prospectivity of tax laws
2. Imprescriptibility
3. Double taxation
1. Is double taxation a valid defense against the legality of a tax measure?
ANSWER:
No. double taxation standing alone and not being forbidden by our fundamental law is not a valid defense
against the legality of a tax measure (Pepsi Cola v. Tanawan 69 SCRA 460). However, if double taxation
amounts to a direct duplicate taxation, in that the same subject Is taxed twice when it should be taxed but once,
in a fashion that both taxes are imposed for the same purpose by the same taxing authority, within the same
jurisdiction or taxing district, for the same taxable period and for the same kind or character of a tax, then it
becomes legally objectionable for being oppressive and inequitable. (BAR 1997)
2. X, a lessor of a property, pays real estate tax on the premises, a real estate dealer’s tax based on rental
receipts and income tax on the rentals. X claims that this is double taxation. Decide.
ANSWER:
There is no double taxation. Double taxation means taxing for the same tax period the same thing or activity
twice, when it should be taxed but once, by the same taxing authority for the same purpose and with the same
kind or character of tax. The real estate tax is a tax on property; the real estate dealer’s tax is a tax on the
privilege to engage in business; while the income tax is a tax on the privilege to earn an income. These taxes are
Page | 4

imposed by different taxing authorities and are essentially of different kind and character [Villanueva vs. City
of Iloilo, 26 SCRA 578). (BAR 1996)
a. Strict sense
b. Broad sense
1. A municipality, BB, has an ordinance which requires that all stores, restaurants, and other
establishments selling liquor should pay a fixed annual fee of P20.000. Subsequently, the municipal
board proposed an ordinance imposing a sales tax equivalent to 5% of the amount paid for the
purchase or consumption of liquor in stores, restaurants and other establishments. The municipal
mayor, CC, refused to sign the ordinance on the ground that it would constitute double taxation.
Is the refusal of the mayor justified? Reason briefly. (5%)
SUGGESTED ANSWER:
No. The refusal of the mayor is not justified. The impositions are of different nature and character. The fixed
annual fee is in the nature of a license fee imposed through the exercise of police power while the 5% tax on
purchase or consumption is a local tax imposed through the exercise of taxing powers. Both a license fee and a
tax may be imposed on the same business or occupation, or for selling the same article and this is not in
violation of the rule against double taxation (Compania General de Tabacos de Filipinos v. City of Manila, 8
SCRA 367 367 [1963]). (BAR 2004)
2. When an item of Income is taxed In the Philippines and the same Income Is taxed in another country, is
there a case of double taxation?
ANSWER:
Yes, but it is only a case of indirect duplicate taxation which is not legally prohibited because the taxes are
imposed by different taxing authorities. (BAR 1997)
c. Constitutionality of double taxation
d. Modes of eliminating double taxation
1. 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? (3%)
SUGGESTED ANSWER:
Caruso has the option either to claim the amount of income tax withheld in U.S. as a deduction from his gross
income in the Philippines, or to claim it as a tax credit (Sec. 34(C)(1)(b), NIRC).
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. (3%)
SUGGESTED ANSWER:
No. The income from abroad of a non-resident citizen is exempt from the Philippine income tax; hence, there is
no international double taxation on said income (Sec. 23, NIRC).
2. What are the usual methods of avoiding the occurrence of double taxation?
ANSWER:
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The usual methods of avoiding the occurrence of double taxation are:
1.
2.
3.
4.

Allowing reciprocal exemption either by law or by treaty;
Allowance of tax credit for foreign taxes paid;
Allowance of deduction for foreign taxes paid; and
Reduction of the Philippine tax rate. (BAR 1997)

4.

Escape from taxation
a. Shifting of tax burden

1. What is tax pyramiding? What is its basis in law? 5%
SUGGESTED ANSWER:
Tax pyramiding refers to the imposition of a tax upon a tax. This occurs when the tax is added as part of the tax
base. It has no basis in law (People v. Sandiganbayan, 467 SCRA 137 [2005]; CIR v. American Rubber Co., 18
SCRA 842 [1966]).
ANOTHER SUGGESTED ANSWER:
Tax pyramiding refers to a situation where some or all of the stages of distribution of goods or services are
taxed, with the accumulation borne by the final consumer. There is tax pyramiding when sales taxes are
applied to both inputs and outputs, thus shifting the tax burden to the ultimate consumer. It has no basis in law
because it violates the principle of uniformity and neutrality in taxation (R.G. Holcombe, Taxing Services, 30
Fla. St. U.L. Rev. 467 [19966]) (BAR 2006)
2. Lily’s Fashion, Inc. is a garment manufacturer located and registered as a Subic Bay Freeport Enterprise
under Republic Act No. 7227 and a non-VAT taxpayer. As such, it is exempt from payment of all local
and national internal revenue taxes. During its operations, it purchased various supplies and materials
necessary, in the conduct of its manufacturing business. The suppliers of these goods shifted to Lily’s
Fashion, Inc. the 10% VAT on the purchased items amounting to P500,000.00. Lily’s Fashion, Inc. filed
with the BIR a claim for refund for the input tax shifted to it by the suppliers.
If you were the Commissioner of Internal Revenue, will you allow the refund? 5%
SUGGESTED ANSWER:
No. The exemption of lily's Fashion, Inc. is only for taxes for which it is directly liable, hence, it cannot claim
exemption for a tax shifted to it, which is not at all considered a tax to the buyer but a part of the purchase
price. Lily's Fashion, Inc. is not the taxpayer in so far as the passed-on tax is concerned and therefore, it cannot
claim for a refund of a tax merely shifted to it. Only taxpayers are allowed to file a claim for refund (Phil.
Acetylene Co., Inc. v. C£R, 20 SCRA 1056 [1987]). (BAR 2006)
3. As an incentive for investors, a law was passed giving newly established companies in certain economic
zone exemption from all taxes, duties, fees, imposts and other charges for a period of three years. ABC
Corp. was organized and was granted such incentive. In the course of business, ABC Corp. purchased
mechanical equipment from XYZ Inc. Normally, the sale is subject to a sales tax.
XYZ Inc. claims, however, that since it sold the equipment to ABC Corp. which is tax exempt, XYZ should
not be liable to pay the sales tax.
Assume arguendo that XYZ had to and did pay the sales tax. ABC Corp. later found out, however, that
XYZ merely shifted or passed on to ABC the amount of the sales tax by increasing the purchase price.
ABC Corp. now claims for a refund from the Bureau of Internal Revenue in an amount corresponding to
the tax passed on to it since it is tax exempt. Is the claim of ABC Corp. meritorious?
SUGGESTED ANSWER:
Page | 6

No. The claim of ABC Corp. is not meritorious. Although the tax was shifted to ABC Corp. by the seller, what is
paid by it is not a tax but part of the cost it has assumed. Hence, since ABC Corp. is not a taxpayer, it has no
capacity to file a claim for refund. The taxpayer who can file a claim for refund is the person statutorily liable
for the payment of the tax. (BAR 2004)
b. Tax avoidance
1. Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of PI million. Said
property has been leased to MAS Corporation, a domestic corporation engaged in manufacturing paper
products, owned 99% by Maria Suerte. In October 2007, EIP Corporation, a real estate developer,
expressed its desire to buy the Makati property at its fair market value of P300 million, payable as
follows: (a) P60 million down payment; and (b) balance, payable equally in twenty four (24) monthly
consecutive installments. Upon the advice of a tax lawyer, Maria Suerte exchanged her Makati property
for shares of stock of MAS Corporation. A BIR ruling, confirming the tax-free exchange of property for
shares of stock, was secured from the BIR National Office and a Certificate Authorizing Registration was
issued by the Revenue District Officer (RDO) where the property was located. Subsequently, she sold
her entire stockholdings in MAS Corporation to EIP Corporation for P300 million. In view of the tax
advice, Maria Suerte paid only the capital gains tax of P29,895,000 (P100,000x 5% plus P298,900,000 x
10%), instead of the corporate income tax of PI04,650,000 (35% on P299 million gain from sale of real
property). After evaluating the capital gains tax payment, the RDO wrote a letter to Maria Suerte,
stating that she committed tax evasion.
Is the contention of the RDO tenable? Or was it tax avoidance that Maria Suerte had resorted to?
Explain. (6%)
SUGGESTED ANSWER:
The contention of the RDO is not tenable. Maria Suerte resorted to tax avoidance and not tax evasion. Tax
avoidance is the use of legal means to reduce tax liability and it is the legal right of a taxpayer to decrease the
amount of what otherwise would be his taxes by means which the law permits. (Heng Tong Textiles Co., Inc. v.
Commissioner, 24 SCRA 767 [1968J\. There is nothing illegal about transferring first the property to' a
corporation in a tax free exchange and later selling the shares obtained in the exchange at a lower tax than
what could have been imposed if the property was sold directly.
ANOTHER SUGGESTED ANSWER:
The contention is devoid of basis. To constitute tax amount of tax less than what is known by the taxpayer to be
legally due; 2) an accompanying state of mind which is described as being evil, in bad faith, willful or deliberate
and not merely accidental; and 3) a course of action or failure of action which is unlawful. The second and third
factors are not present in the instant case, hence there is no tax evasion that was committed. The means
employed to reduce taxes being allowed by law, it was a case of tax avoidance that was resorted to.
(Commissioner v. Toda, 438 SCRA 290 [2004]). (BAR 2008)
1. Mr. Pascual's income from leasing his property reaches the maximum rate of tax under the law. He
donated one-half of his said property to a non-stock, non-profit educational institution whose income
and assets are actually, directly and exclusively used for educational purposes, and therefore qualified
for tax exemption under Article XTV, Section 4 (3) of the Constitution and Section 30 (h) of the Tax
Code. Having thus transferred a portion of his said asset. Mr. Pascual succeeded in paying a lesser tax
on the rental income derived from his property. Is there tax avoidance or tax evasion? Explain. (2%)
SUGGESTED ANSWER:
There is tax avoidance. Mr. Pascual has exploited a legally permissive alternative method to reduce his income
tax by transferring part of his rental income to a tax exempt entity through a donation of one-half of the income
producing property. The donation is likewise exempt from the donor’s tax. The donation is the legal means
employed to transfer the incidence of income tax on the rental income. (BAR 2000)
Page | 7

2. Distinguish tax evasion from tax avoidance.
ANSWER:
Tax evasion is a scheme used outside of those lawful means to escape tax liability and, when availed of, it
usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax avoidance, on the other
hand, is a tax saving device within the means sanctioned by law, hence legal. (BAR 1996)
c. Tax evasion
1. Josel agreed to sell his condominium unit to Jess for P2. 5 Million. At the time of the sale, the property
had a zonal value of P2.0 Million. Upon the advice of a tax consultant, the parties agreed to execute two
deeds of sale, one indicating the zonal value of P2.0 Million as the selling price and the other showing
the true selling price of P2.5 Million. The tax consultant filed the capital gains tax return using the deed
of sale showing the zonal value of' P2.0 Million as the selling price.
Discuss the consequences of the action taken by the parties. (5%)
SUGGESTED ANSWER:
Both Josel and his tax consultant are criminally liable for tax evasion. Here, it is clear that the three requisite
factors to constitute tax evasion are present, viz: (1) the end to be achieved which is the payment of less than
that known by them to be legally due; (2) an accompanying state of mind which is evil, in bad faith, willfull or
deliberate and not merely accidental; and (3) a course of action which is unlawful. [CIR v. Estate of Benigno P.
Toda, Jr., 438 SCRA 290 (2004)]. (BAR 2005)
2. In 1995, the BIR filed before the Department of Justice (DOJ) a criminal complaint against a corporation
and its officers for alleged evasion of taxes. The complaint was supported by a sworn statement of the
BIR examiners showing the computation of the tax liabilities of the erring taxpayer. The corporation
filed a motion to dismiss the criminal complaint on the ground that there has been, as yet, no
assessment of its tax liability; hence, the criminal complaint was premature. The DOJ denied the motion
on the ground that an assessment of the tax deficiency of the corporation is not a precondition to the
filing of a criminal complaint and that in any event, the joint affidavit of the BIR examiners may be
considered as an assessment of the tax liability of the corporation.
Is the ruling of the DOJ correct? Explain. (5%)
SUGGESTED ANSWER:
Yes. The ruling of the DOJ in denying the motion is correct. The issuance of the deficiency assessment notice
prior to prosecution is not necessary because the facts of the case show that the crime of evasion is complete
since the violator has knowingly and willfully filed a fraudulent return with intent to evade/defeat a part or all
of the tax. [Ungdb v. Cusi, Jr., 97 SCRA 877 (1980)]. What is involved here is not the collection of taxes but a
criminal prosecution for violation of the National Internal Revenue Code.
However, the contention that the joint affidavit of the BIR examiners showing the computation of tax liabilities
maybe considered an assessment is erroneous. It is not an assessment which may entitle the taxpayer to
protest. [CIR v. Pascor Realty 81 Development Corp., 309 SCRA402 (1999)]. An assessment is a formal notice to
the taxpayer stating that the amount thereon is due as a tax and containing a demand for the payment thereof.
[Alhambra Cigar & Cigarette Mfg. Co. v. Collector, 105 Phil. 1337 (1959)] (BAR 2005)
3. Distinguish tax evasion from tax avoidance.
ANSWER:
Tax evasion is a scheme used outside of those lawful means to escape tax liability and, when availed of, it
usually subjects the taxpayer to further or additional civil or criminal liabilities. Tax avoidance, on the other
hand, is a tax saving device within the means sanctioned by law, hence legal. (BAR 1996)
Page | 8

5.

Exemption from taxation

1. The President of the Philippines and the Prime Minister of Japan entered into an executive agreement
in respect of a loan facility to the Philippines from Japan whereby it was stipulated that interest on
loans granted by private Japanese financial institutions to private financial Institutions in the
Philippines shall not be subject to Philippine income taxes.
Is this tax exemption valid? Explain
ANSWER:
Yes. The tax exemption is valid because an executive agreement has the force and effect of a treaty under the
provision of the Revenue Code. Taxation is subject to International Comity.
ALTERNATIVE ANSWERS:
a) The act of tax exemption is an act of taxation which is inherently legislative. Therefore, a mere executive
agreement cannot provide for a tax exemption.
b) No. Under the NIRC, for interest on investment in the Philippines in loans to be exempt from taxation, such
investment must have been made by foreign government-owned or controlled financing institutions or
international financing institutions established by governments. In the case at bar, the loans would be
granted by private Japanese financial institutions and therefore, the interest thereon would not be exempt
from taxation. (BAR 1992)
2. In a loan agreement between the Central Bank of the Philippines (as borrower) and private
international bank (as lender), it is stipulated that all payments of Interest by the Central Bank to the
lenders shall be made free and clear from all Philippine taxes which may be imposed thereon.
Is the stipulation valid? Explain.
ANSWER:
No. The act of tax exemption is an act of taxation which is inherently legislative and, therefore, a mere executive
agreement without concurrence by Congress cannot provide for a tax exemption.
ALTERNATIVE ANSWER:
It is valid. The stipulation in the agreement that the lender “shall be made free and clear" from all Philippine
taxes, simply meant that the Central Bank will assume the tax liability which is not contrary to law, morals,
good customs, public order or public policy. (BAR 1992)
a. Meaning of exemption from taxation
b. Nature of tax exemption
c. Kinds of tax exemption
d. Rationale/grounds for exemption
e. Revocation of tax exemption
6.

Compensation and set-off

1. The doctrine of equitable recoupment allows a taxpayer whose claim for refund has prescribed to
offset tax liabilities with his claim of overpayment.
SUGGESTED ANSWER:
True. The doctrine arose from common law allowing offsetting of a prescribed claim for refund against a tax
liability arising from the same transaction on which an overpayment is made and underpayment is due. The
doctrine finds no application to cases where the taxes involved are totally unrelated, and although it seems
equitable, it is not allowed in our jurisdiction (CIR v. VST, 104 Phil. 1062 [1958]). (BAR 2009)
Page | 9

2. ABC Corporation won a tax refund case for P50 Million. Upon execution of the judgment and when
trying to get the Tax Credit Certificates (TCC) representing the refund, the Bureau of Internal Revenue
(BIR) refused to issue the TCC on the basis of the fact that the corporation is under audit by the BIR and
it has a potential tax liability. Is there a valid justification for the BIR to withhold the issuance of the
TCC? Explain your answer briefly.
SUGGESTED ANSWER:
The BIR has no valid justification to withhold the TCC. Offsetting the amount of TCC against a potential
tax liability is not allowed, because both obligations are not yet fully-liquidated. While the amount of
the TCC has been determined, the amount of deficiency tax is yet to be determined through the
completion of the audit. (PhilexMining Corporation v. CIR, 294 SCRA 687[1998]).
ALTERNATIVE ANSWER:
There is no valid justification to withhold the TCC. The requirement, that the claim for refund/TCC and liability
for deficiency taxes must be settled under one proceeding to avoid multiplicity of suits, will not apply since the
determination of the entitlement to the refund was already removed from the BIR. To reopen the claim for
refund in order to give way to the introduction of evidence of a deficiency assessment will lead to an endless
litigation, which is not allowed. (CIR v. Citytrust Banking Corporation, 499 SCRA 477[2006]). (BAR 2007)
3. May taxes be the subject of set-off or compensation? Explain.
SUGGESTED ANSWER:
No. Taxes cannot be the subject of set-off or compensation for the following reasons: (1) taxes are of distinct
kind, essence and nature, and these impositions cannot be classed in merely the same category as ordinary
obligations; (2) the applicable laws and. principles governing each are peculiar, not necessarily common, to
each; and (3) public policy is better subserved if the integrity and independence of taxes are maintained.
[Republic v. Mambulao Lumber Company, 4 SCRA 622 (1962)].
However, if the obligation to pay taxes and the taxpayer’s claim against the government are both overdue,
demandable, as well as fully liquidated, compensation takes place by operation of law and both obligations are
extinguished to their concurrent amounts. [Domingo v. Garlitos, 8 SCRA 443 (1963)]. (BAR 2005)
4. Can an assessment for a local tax be the subject of set-off or compensation against a final judgment for a
sum of money obtained by the taxpayer against the local government that made the assessment?
Explain.
SUGGESTED ANSWER:
No. Taxes and debts are of different nature and character; hence, no set-off or compensation between these two
different classes of obligations is allowed. The taxes assessed are the obligations of the taxpayer arising from
law, while the money judgment against the government is an obligation arising from contract, whether express
or implied. Inasmuch that taxes are not debts, it follows that the two obligations are not susceptible to set-off
or legal compensation. [Francia v. Intermediate Appellate Court, 162 SCRA 753 (1988)].
It is only when the local tax assessment and the final judgment are both overdue, demandable, as well fully
liquidated may set-off or compensation be allowed. [Domingo v. Garlitos, 8 SCRA 443, (1963)]. (BAR 2005)
5. May a taxpayer who has pending claims for VAT input credit or refund, set-off said claims against his
other tax liabilities? Explain your answer. (5%)
SUGGESTED ANSWER:
No. Set-off is available only if both obligations are liquidated and demandable. Liquidated debts are those
where the exact amounts have already been determined. In the instant case, the claim of the taxpayer for VAT
refund is still pending and the amount has still to be determined. A fortiori, the liquidated obligation of the
Page | 10

taxpayer to the government cannot, therefore, be set-off against the unliquidated claim which the taxpayer
conceived to exist in his favor. [Philex Mining Corp. v. CIR, GR No. 125704, August 29, 1998).
ALTERNATIVE ANSWER:
No. Taxes and claims for refund cannot be the subject of set-off for the simple reason that the government and
the taxpayer are not creditors and debtors of each other. There is a material distinction between a tax and a
claim for refund. Claims for refunds just like debts are due from the government in its corporate capacity, while
taxe3 are due to the government in its sovereign capacity. [Philex Mining Corp. v. CIR, GR No. 125704, August
29, 1998). (BAR 2001)
6. X is the owner of a residential lot situated at Quirino Avenue, Pasay City. The lot has an area
of300square meters. On June 1, 1994, 100 square meters of said lot owned by X was expropriated by
the government to be used in the widening of Quirino Avenue, for P300,000.00 representing the
estimated assessed value of said portion. From 1991 to 1995. X. who is a businessman, has not been
paying his income taxes. X is now being assessed for the unpaid income taxes in the total amount of
PI50,000.00. X claims his income tax liability has already been compensated by the amount of
P300.000.00 which the government owes him for the expropriation of his property. Decide.
ANSWER:
The income tax liability of X cannot be compensated with the amount owed by the Government as
compensation for his property expropriated. Taxes are of distinct kind, essence and nature than ordinary
obligations. Taxes and debts cannot be the subject of compensation because the Government and X are not
mutually creditors and debtors of each other and a claim for taxes is not a debt, demand, contract, or judgment
as is allowable to be set off. (Francia vs. LAC, G.R 76749. June 28, 1988) (BAR 1996)
7. Ms. Edna Dinoso is the registered owner of a residential lot with a two-story house situated in Naga
City. The lot with an area of328 sq. meter is described and covered by TCT No. 4739 of the Registry of
Deeds of Naga City.
On September 12. 1977, a 115 sq. meter portion of Edna’s property was expropriated by the
Republic of the Philippines for the sum of P6.700.00 representing the assessed value of the aforesaid
portion: This amount was deposited by the Government in Edna’s account.
For almost ten (10) years, Edna failed to pay her real estate taxes on the same property. Thus, on
November 5, 1977, her property was sold at public auction by the City Treasurer of Naga City to
satisfy her real estate tax delinquencies amounting to P5, 800.00. The highest bidder for the property
was Angel Chua.
Edna was not present at the public auction although she later admitted having received the notice of
hearing for the petition for entry of a new certificate of title by Angel Chua. (Both the auction sale
and the final bill of sale were annotated at the back of TCT No. 4739 by the Register of Deeds.)
On March 15, 1979, Edna filed a complaint to annul the auction sale which was denied by the CFI
Judge of Naga City. In fact, the CFI Judge ordered the TCT # 4739 of Edna be cancelled and that a new
title be issued to Angel Chua.
On appeal, the Court of Appeals affirmed the CFI decision in toto. Edna then elevated the case to the
Supreme Court citing several grave errors of law, among which are:
That her tax delinquencies (involving P5, 800.00) for non-payment of real estate taxes were offset by
the sum of P6,700.00which the government of the Philippines owed her. She claims that her tax
delinquencies have been extinguished by legal compensation:
Discuss the merits of the appeal.
Page | 11

ANSWER:
The decision of the Court of Appeals affirming the CFI decision must be affirmed.
On the procedural aspect, it has not been shown, as required under the Real Property Tax Code that plaintiff
has paid the amount for which the real property has been sold plus interest.
On the claim of extinction of tax liability by legal compensation, there is jurisprudence to the effect that the
doctrine of equitable recoupment does not apply in this Jurisdiction. Assuming it does, the facts of the case
bear out that the Government does not owe the plaintiff any amount. (BAR 1992)
7.
8.

Compromise
Tax amnesty
a. Definition
b. Distinguished from tax exemption

1. Distinguish a tax amnesty from a tax exemption. (3%)
SUGGESTED ANSWER:
Tax amnesty is immunity from all criminal, civil and administrative liabilities arising from nonpayment of
taxes. It is a general pardon given to all taxpayers. It applies only to past tax periods, hence of retroactive
application. (People v. Castaneda, G.R. No. L- 46881, 1988).
Tax exemption is immunity from the civil liability only. It is an immunity or privilege, a freedom from a charge
or burden to which others are subjected. (Florer v. Sheridan, 137 Ind. 28, 36 NE 365). It is generally
prospective in application. (BAR 2001)
9.

Construction and interpretation
a. Tax laws
b. Tax exemption and exclusion

1. Citing Section 10. Article VIII of the 1987 Constitution which provides that salaries of judges shall be
fixed by law and that during their continuance in office their salary shall not be decreased, a judge of
MM Regional Trial Court questioned the deduction of withholding taxes from his salary since it results
into a net deduction of his pay.
Is the contention of the judge correct? Reason briefly. (5%)
SUGGESTED ANSWER:
No. The contention is incorrect. The salaries of judges are not tax-exempt and their taxability is not contrary to
the provisions of Section 10, Article V of the Constitution on the non-diminution of the salaries of members of
the judiciary during their continuance in office. The clear intent of the Constitutional Commission that framed
the Constitution is to subject their salaries to tax as in the case of all taxpayers. Hence, the deduction of
withholding taxes, being a manner of collecting the income tax on their salary, is not a diminution
contemplated by the fundamental law. (Nitqfan et, al. v, CIR, 152 SCRA 284 [1987)} (BAR 2004)
2. As an incentive for investors, a law was passed giving newly established companies in certain economic
zone exemption from all taxes, duties, fees, imposts and other charges for a period of three years. ABC
Corp. was organized and was granted such incentive. In the course of business, ABC Corp. purchased
mechanical equipment from XYZ Inc. Normally, the sale is subject to a sales tax.
XYZ Inc. claims, however, that since it sold the equipment to ABC Corp. which is tax exempt, XYZ should
not be liable to pay the sales tax. Is this claim tenable? (5%)
Page | 12

SUGGESTED ANSWER:
No. Exemption from taxes is personal in nature and covers only taxes for which the taxpayer-grantee is directly
liable. The sales tax is a tax on the seller who is not exempt from taxes. Since XYZ Inc. is directly liable for the
sales tax and no tax exemption privilege is ever given to him, therefore, its claim that the sale is tax exempt is
not tenable. A tax exemption is construed in strictissimi Juris and it cannot be permitted to exist upon vague
implications (Asiatic Petroleum Co., Ltd. V. Llanes, 49 Phil 466 [1926]). (BAR 2004)
3. Why are tax exemptions strictly construed against the taxpayer?
ANSWER:
Tax exemptions are strictly construed against the taxpayer because such provisions are highly disfavored and
may almost be said to be odious to the law (Manila Electric Company vs. Vera, 67 SCRA351). The exception
contained in the tax statutes must be strictly construed against the one claiming the exemption because the law
does not look with favor on tax exemptions they being contrary to the life-blood theory which is the underlying
basis for taxes. (BAR 1996)
c. Tax rules and regulations
1. In civil cases involving the collection of internal revenue taxes, prescription is construed strictly
against the government and liberally in favor of the taxpayer. (1%)
SUGGESTED ANSWER:
TRUE. [CIR v. BF Goddrich., Phils. Inc., GR No. 104171, Feb 24, 1999; Phil. Journalists Inc. v. CIR G.R. No.
162852, Dec. 16, 2004]
2. XYZ Corporation, an export-oriented company, was able to secure a Bureau of Internal Revenue (BIR)
ruling in June 2005 that exempts from tax the importation of some of its raw materials. The ruling is of
first impression, which means the interpretations made by the Commissioner of Internal Revenue are
one without established precedents. Subsequently, however, the BIR issued another ruling which in
effect would subject to tax such kind of importation. XYZ Corporation is concerned that said ruling may
have a retroactive effect, which means that all their importations done before the issuance of the
second ruling could be subject to tax.
What are BIR rulings?
SUGGESTED ANSWERS:
BIR rulings are administrative opinions issued by the Commissioner of Internal Revenue interpretative of a
provision of a tax law.
ALTERNATIVE ANSWER:
They are the best guess of the moment and incidentally often contain such well-considered and sound law, but
the courts have held that they do not prevent an entire change of front at any time and are merely advisory sort of an information service to the taxpayer. (Aban, Law of Basic Taxation in the Philippines, p. 149 citing
Quiazon and Lukban). (BAR 2007)
d. Penal provisions of tax laws
1. In criminal cases involving tax offenses punishable under the National Internal Revenue Code (NIRC),
prescription is construed strictly against the government. (1%)
SUGGESTED ANSWER:
FALSE. [Lim v. Court of Appeals, GR No. 48134-37, Oct 18, 1990.]
Page | 13

e. Non-retroactive application to taxpayers
1. Does a BIR ruling have a retroactive effect, considering the principle that tax exemptions should be
interpreted strictly against the taxpayer?
SUGGESTED ANSWER:
No. A BIR ruling cannot be given retroactive effect if its retroactive application is prejudicial to the taxpayer.
(Section 246, NIRC; CIR v. Court of Appeals et. al. 267 SCRA 557[1997]).
ALTERNATIVE ANSWER:
The general rule is that a BIR ruling does not have a retroactive effect if giving it a retroactive application is
prejudicial to the taxpayer. However, if the first ruling is tainted with either of the following: (1) misstatement
or omission of material facts, (2) the facts gathered by the BIR are materially different from the facts upon
which the ruling is based, or (3) the taxpayer acted in bad faith, a subsequent ruling can have a retroactive
application. (ABS-CBN Broadcasting Co. v. CTA & CIR, 08 SCRA 142 [1981]; Sec 246, NIRC). (BAR 2007)
2. Due to an uncertainty whether or not a new tax law is applicable to printing companies. DEF Printers
submitted a legal query to the Bureau of Internal Revenue on that issue. The BIR issued a ruling that
printing companies are not covered by the new law. Relying on this ruling, DEF Printers did not pay
said tax.
Subsequently, however, the BIR reversed the ruling and issued a new one stating that the tax covers
printing companies. Could the BIR now assess DEF Printers for back taxes corresponding to the years
before the new ruling? Reason briefly. (5%)
SUGGESTED ANSWER:
No. Reversal of a ruling shall not be given a retroactive application if said reversal will be prejudicial to the
taxpayer. Therefore, the BIR cannot assess DEF printers for back taxes because it would be violative of the
principle of non-retroactivity of rulings and doing so would result in grave injustice to the taxpayer who relied
on the first ruling in good faith (Section 246, NIRC; CIR v. Burroughs, Inc,, 142 SCRA 32411986]), (BAR 2004)
I.

Scope and limitation of taxation
1. Inherent limitations

1. Enumerate the four (4) inherent limitations on taxation. Explain each item briefly. (4%)
ANSWER:
The inherent limitations on the power to tax are:
1. Taxation is for a public purpose. - The proceeds of the tax must be used (a) for the support of the State or
(b) for some recognized objective of the government or to directly promote the welfare of the community.
2.

Taxation is inherently legislative. - Only the legislature has full discretion as to the persons, property,
occupation or business to be taxed provided these are all within the State’s territorial jurisdiction. It can
also finally determine the amount or rate of tax, the kind of tax to be imposed and the method of collection
(1 Cooley 176184).

3.

Taxation is territorial. - Taxation may be exercised only within the territorial jurisdiction of the taxing
authority (61 Am. Jur. 88). Within the territorial jurisdiction, the taxing authority may determine the place
of taxation” or “ tax situs",

4.

Taxation is subject to international comity. - This is a limitation which is founded on reciprocity designed
to maintain a harmonious and productive relationships among the various states. Under international
comity, a state must recognize the generally-accepted tenets of international law, among which are the
Page | 14

principles of sovereign equality among states and of their freedom from suit without their consent, that
limit the authority of a government to effectively impose taxes on a sovereign state and its
instrumentalities, as well as on its property held, and activities undertaken in that capacity. (BAR 2009)
a. Public purpose
b. Inherently legislative
(1) Exceptions
(i) Delegation to local governments
1. May Congress, under the 1987 Constitution, abolish the power to tax of local governments?
SUGGESTED ANSWER:
No. Congress cannot abolish what is expressly granted by the fundamental law. The only authority conferred to
Congress is to provide the guidelines and limitations on the local government’s exercise of the power to tax
(Sec. 5, Art X, 1987 Constitution). (BAR 2003)
2. Congress, after much public hearing and consultations with various sectors of society, came to the
conclusion that it will be good for the country to have only one system of taxation by centralizing the
imposition and collection of all taxes in the national government. Accordingly, it is thinking of passing a
law that would abolish the taxing power of all local government units. In your opinion, would such a
law be valid under the present Constitution? Explain your answer. (5%)
SUGGESTED ANSWER:
No. The law centralizing the imposition and collection of all taxes in the national government would contravene
the Constitution which mandates that : . . . "Each local government unit shall have the power to create their
own sources of revenue and to levy taxes, fees, and charges subject to such guidelines and limitations as
Congress may provide consistent with the basic policy of local autonomy." It is clear that Congress can only
give the guidelines and limitations on the exercise by the local governments of the power to tax but what was
granted by the fundamental law cannot be withdrawn by Congress. (BAR 2001)
(ii) Delegation to the President
(iii) Delegation to administrative agencies
c. Territorial
(1) Situs of taxation
(a) Meaning
(b) Situs of income tax
1. From what sources of income are the following persons/ corporations taxable by the Philippine
government?
1. Citizen of the Philippines residing therein; [1%]
2. Non-resident citizen; [1%]
3. An individual citizen of the Philippines who is working and deriving income from abroad as an
overseas contract worker; [1%]
4. An alien individual, whether a resident or not of the Philippines; [1%]
5. A domestic corporation; [1%)
SUGGESTED ANSWER:
(Section 23, NIRC of 1997)
1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and
without the Philippines.
Page | 15

2. A nonresident citizen is taxable only on income derived from sources within the Philippines.
3. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas
contract worker is taxable only on income from sources within the Philippines.
4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from
sources within the Philippines.
5. A domestic corporation is taxable on all income derived from sources within and without the
Philippines. (BAR 1998)
2. Juan, a Filipino citizen, has immigrated to the United States where he is now a permanent resident. He
owns certain income-earning property in the Philippines from which he continues to derive substantial
income. He also receives income from his employment in the United States on which the US income tax
is paid.
On which of the above income is the taxable, if at all, in the Philippines, and how, in general terms,
would such income or incomes be taxed?
ANSWER:
Juan shall be taxed on both his Income from the Philippines and on his income from the United States because
his being a citizen makes him taxable on all income wherever derived. For the income he derives from his
property in the Philippines, Juan shall be taxed on his net Income under the Simplified Net Income Taxation
Scheme (SN1TS) whereby he shall be considered as a self-employed individual. His income as employee in the
United States, on the other hand, shall be taxed in accordance with the schedular graduated rates of 1%, 2%
and 3% based on the adjusted gross income derived by non-resident citizens from all sources without the
Philippines during each taxable year. (BAR 1997)
3. What is the principle of mobilia sequuntur personam in income taxation?
ANSWER:
Principle of mobilia sequuntur personam in income taxation refers to the principle that taxation follows the
property or person who shall be subject to the tax. (BAR 1994)
4. Newtex International (Phils.) Inc. is an American firm duly authorized to engage in business in the
Philippines as a branch office. In its activity of acting as a buying agent for foreign buyers of shirts and
dresses abroad and performing liason work between its home office and the Filipino garment
manufacturers and exporters. Newt ex does not generate any income. To finance its office expenses
here, its head office abroad regularly remits to it the needed amount. To oversee its operations and
manage its office here, which had been in operation for two (2) years, the head office assigned three
(3) foreign personnel.
Are the three foreign personnel subject to Philippine income tax?
ANSWER:
The three (3) foreign personnel are subject to tax on the income that they receive for services rendered in the
Philippines. Non-resident aliens are subject to tax on income from sources within the Philippines. Income is
deemed derived from sources within the country when it is earned for services rendered in the Philippines
(Sec. 22. in relation to Sec. 36, NIRC). (BAR 1991)
(1) From sources within the Philippines
1. 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
Page | 16

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. (4%)
SUGGESTED ANSWER:
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 the 35% tax based on its
taxable income pursuant to Section 25(a)( 1) of the Tax Code of 1977. 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 from 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]).
Note: The taxable year involved in the problem is 1997, hence, the suggested answer above follows the
applicable provision of the old Tax Code (National Internal Revenue Code of1977) then in effect and the
prevailing jurisprudence on the matter. However, with the adoption of the National Internal Revenue Code
ofl997(RA 8424) which took effect on January 1, 1998, it is expected that the bar candidates have lost track of
the change in the tax law which transpired more than a decade ago. For this reason, it is respectfully requested
that an answer based on the provisions of the New Tax Code shall be given full credit. Accordingly, an answer
framed in this wise should also be considered as a correct answer, viz:
ANOTHER SUGGESTED ANSWER:
Yes. KIA is a non-resident foreign corporation which is taxable only on income from within. The income of KIA
as an international air carrier is derived from the sale of transportation services. Compensation for services is
an income from within if the services are performed in the Philippines (Section 42(A)(3), NIRC). The
origination of the flight is determinative of the source of the income of the international air carrier. If the flight
originates in the Philippines to a foreign destination, the income is an income from within; if it originates in a
foreign country to any destination, the income is from without. In the case at bar, no flight will originate from
the Philippines because KIA is not licensed to do business here. Hence, the income is not taxable in the
Philippines (Section 28(A)(3)(a), NIRC). (BAR 2009)
2. Caledonia Aircargo is an off-line international carrier without any flight operations in the Philippines.
It has, however, a liaison office in the Philippines which is duly licensed with the Securities and
Exchange Commission, established for the purpose of providing passenger and flight information,
reservation and ticketing services.
Are the revenues of Caledonia Aircargo from tickets reserved by its Philippine office subject to tax?
ANSWER:
The revenues in the Philippines of Caledonia Aircargo as an “off-line'’ airline from ticket reservation services
are taxable income from “whatever source" under Sec. 28(a) of theTax Code. This case is analogous to
Commissioner v. BOAC. G.R No. No. 65773-74, April 30, 1987 where the Supreme Court ruled that the income
Page | 17

received in the Philippines from the sale of tickets by an “off-line" airline is taxable as Income from whatever
source. (BAR 1994)
(2) From sources without the Philippines
1. 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 for
1997 on March 15.1998. After an audit of the 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. (2%)
SUGGESTED ANSWER:
The income of Mr. Sebastian as a seaman is considered as income of a non-resident citizen derived from
without the Philippines. The total gross income, in US dollars (or if in other foreign currency, its dollar
equivalent) from without shall be declared by him for income tax purposes using a separate income tax return
which will not include his income from business derived within (to be covered by another return). He is
entitled to deduct from his dollar gross income a personal exemption of $4,500 and foreign national Income
taxes paid to arrive at his adjusted income during the year. His adjusted income will be subject to the
graduated’ tax rates of 1% to 3%. (Sec. 21(b), Tax Code of 1986[PD 1158], as amended by PD 1994).
Note:
The bar candidates are not expected to be familiar with tax history. Considering that this is already the fourth
year of implementation of the Tax Code of 1997, bar candidates were taught and prepared to answer questions
based on the present law. It is therefore requested that the examiner be more lenient in checking the answers
to this question. Perhaps, an answer based on the present law be given full credit. (BAR 2002)
(3) Income partly within and partly without the Philippines
(c) Situs of property taxes
(1) Taxes on real property
(2) Taxes on personal property
(d) Situs of excise tax
(1) Estate tax
(2) Donor’s tax
(e) Situs of business tax
(1) Sale of real property
(2) Sale of personal property
(3) Value-Added Tax (VAT)
b. International comity
1. ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders who
are residents of the United States. For the 2nd quarter of 1983, these U.S.- based individual and
corporate stockholders received cash dividends from the corporation. The corresponding withholding
tax on dividend income — 30% for individual and 35% for corporate non-resident stockholders — was
deducted at source and remitted to the BIR.
On May 15,1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund,
alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends earned
was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax due on the
cash dividends given to its non-resident stockholders in the U.S. the Commissioner denied the claim.
Page | 18

On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its demand
for refund.
Is the contention of ABCD Corporation correct? Why or why not? (3%)
SUGGESTED ANSWER:
Yes. The provision of a treaty must take precedence over and above the provisions of the local taxing statute
consonant with the principle of the international comity. Tax treaties are accepted limitations to the power of
taxation. Thus, the CTA should apply the treaty provision so that the claim for refund representing the
difference between the amount actually withheld and paid to the BIR and the amount due and payable under
the treaty, should be granted (Hawaiian-Philippine Company v. CIR, CTA Case No. 3887, May 31, 1988).
ANOTHER SUGGESTED ANSWER:
The contention of ABCD Corporation that it overpaid the withholding tax is correct provided it can establish:
(1) The existence of RP-US Tax Treaty is imposing a lower rate of tax of 25%; (2) the said tax treaty is
applicable to its case; and (3) its payment with the BIR of a tax based on a higher rate of 30% and 35%,
respectively. (BAR 2009)
c. Exemption of government entities, agencies and instrumentalities
2.

Constitutional limitations
a. Provisions directly affecting taxation
(1) Prohibition against imprisonment for non-payment of poll tax
(2) Uniformity and equality of taxation

1. The City of Makati, in order to solve the traffic problem in its business districts, decided to impose a tax,
to be paid by the driver, on all private cars entering the city during peak hours from 8:00 a.m. to 9:00
a.m. from Mondays to Fridays, but exempts those cars carrying more than two occupants, excluding the
driver. Is the ordinance valid? Explain.
SUGGESTED ANSWER:
The ordinance is in violation of the Rule of Uniformity and Equality, which requires that all subjects or objects
of taxation, similarly situated must be treated alike in equal footing and must not classify the subjects in an
arbitrary manner. In the case at bar, the ordinance exempts cars carrying more than two occupants from
coverage of the said ordinance. Furthermore, the ordinance only imposes the tax on private cars and exempts
public vehicles from the imposition of the tax, although both contribute to the traffic problem. There exists no
substantial standard used in the classification by the City of Makati.
Another issue is the fact that the tax is imposed on the driver of the vehicle and not on the registered owner of
the same. The tax does not only violate the requirement of uniformity, but the same is also unjust because it
places the burden on someone who has no control over the route of the vehicle.
The ordinance is, therefore, invalid for violating the rule of uniformity and equality as well as for being unjust.
(BAR 2003)
2. Explain the requirement of uniformity as a limitation in the imposition and/or collection of taxes. [5%]
SUGGESTED ANSWER:
Uniformity in the imposition and/or collection of taxes means that all taxable articles or kinds of property of
the same class shall be taxed at the same rate. The requirement of uniformity is complied with when the tax
operates with the same force and effect in every place where the subject of it is found (Churchill & Tait v.
Conception, 34 Phil. 969). It does not mean that lands, chattels, securities, income, occupations, franchises,
privileges, necessities and luxuries shall be assessed at the same rate. Different articles maybe taxed at
Page | 19

different amounts provided that the rate is uniform on the same class everywhere with all people at all times.
Accordingly, singling out one particular class for taxation purposes does not infringe the requirement of
uniformity.
FIRST ALTERNATIVE ANSWER:
The criteria is met when the tax laws operate equally and uniformly on all persons under similar
circumstances. All persons are treated in the same manner, the conditions not being different, both in
privileges conferred and liabilities imposed. Uniformity in taxation also refers to geographical uniformity.
Favoritism and preference is not allowed.
SECOND ALTERNATIVE ANSWER:
A tax is deemed to have satisfied the uniformity rule when it operates with the same force and effect in every
place where the subject maybe found. (Phil. Trust 8L Co. v. Yatco. 69 Phil. 420). (BAR 1998)
3. Five years ago Marquez, Peneyra, Jayme, Posadas and Manguiat, all lawyers, formed a partnership
which they named Marquez and Peneyra Law Offices. The Commissioner of Internal Revenue thereafter
issued Revenue Regulation No. 2-93 implementing RA. 7496 known as the Simplified Net Income
Taxation Scheme (SNITS). Revenue Regulation No. 2-93 provides in part:
“Sec. 6. General Professional Partnership. -The general professional partnership and the
partners are covered by RA. 7496. Thus, in determining profit of the partnership, only the direct costs
mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred
by partners in their individual capacities in the practice of their profession which are not reimbursed
or paid by the partnership but are not considered as direct costs are not deductible from his gross
income.”
Marquez and Peneyra Law Offices filed a taxpayer’s suit alleging that Revenue Regulation No. 2-93
violates the principle of uniformity in taxation because general professional partnerships are now
subject to payment of income tax and that there is a difference in the tax treatment between individuals
engaged in the practice of their respective professions and partners in general professional
partnerships.
Is this contention correct? Explain.
ANSWER:
The contention is not correct. General professional partnerships remain to be a non-taxable entity. What is
taxable are the partners comprising the same and they are obligated to report as income their share in the
income of the general professional partnership during the taxable year whether distributed or not. The SNITS
treat professionals as one class of taxpayer so that they shall be treated alike irrespective of whether they
practice their profession alone or in association with other professionals under a general professional
partnership. What are taxed differently are individuals and corporations. All individuals similarly situated are
taxed alike under the regulations, therefore, the principle of uniformity in taxation is not violated. On the
contrary, all the requirements of a valid classification have been complied with [Tan vs. del Rosario et al G.R
No. 109289, October 3. 1994). (BAR 1995)
(3) Grant by Congress of authority to the president to impose tariff rates
(4) Prohibition against taxation of religious, charitable entities, and educational entities
1. A law imposing a tax on income of religious institutions derived from the sale of religious articles is
valid.
SUGGESTED ANSWER:
False. Congress can pass a law taxing income of religious institutions from its property or activities used for
profit but not on their income from exercise of religious activities. The imposition of a tax on income of a
Page | 20

religious institution from sale of religious articles is an infringement of religious freedom which is not allowed
under the fundamental law (American Bible Society v. City of Manila, 101 Phil. 386[1957J).
2. The Constitution provides “charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, and non-profit cemeteries and all lands, buildings, and improvements actually,
directly and exclusively used for religious, charitable or educational purposes shall be exempt from
taxation." This provision exempts charitable institutions and religious institutions from what kind of
taxes? Choose the best answer. Explain. 5%
a.
b.
c.
d.
e.

from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and real property tax
from income tax only
from value-added tax only
from real property tax only
from capital gains tax only

SUGGESTED ANSWER:
I choose (d), from real property tax only. This is the connotation of the phrase “and all lands, buildings and
improvements" thereby limiting the exemption to real property taxes only (CIR v. CA, 298 SCRA 83 [1998];
Lladoc v. Commissioner, 14 SCRA 292 [1967]; Hodges v. Municipal Board of Iloilo City, 19 SCRA 28 [1965]).
(BAR 2006)
3. The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac province. The southern side and
middle part are occupied by the Church and a convent, the eastern side by a school run by the Church
itself, the southeastern side by some commercial establishments, while the rest of the property, in
particular the northwestern side, is idle or unoccupied.
May the Church claim tax exemption on the entire land? Decide with reasons. (5%)
SUGGESTED ANSWER:
No. The portions of the land occupied and used by the church, convent and school run by the church are
exempt from real property taxes while the portion of the land occupied by commercial establishments and the
portion, which is idle, are subject to real property taxes. The “usage” of the property and not the “ownership" is
the determining factor whether or not the property is taxable. [Lung Center of the Philippines v. Q.C., 433 SCRA
119 (2004)]. (BAR 2005)
4. XYZ Colleges is a non-stock, non-profit educational institution run by the Archdiocese of BP City. It
collected and received the following:
(a)
(b)
(c)
(d)
(e)

Tuition fees
Dormitory fees
Rentals from canteen concessionaires
Interest from money-market
Donation of a lot and building by school alumni

SUGGESTED ANSWER:
All of the Income derived by the non-stock, nonprofit educational institution will be exempt from taxation
provided they are used actually, directly and exclusively for educational purposes. The Constitution provides
that all revenues and assets of non-stock, non-profit educational institution which are actually, directly and
exclusively used for educational purposes are exempt from taxation (Section 4 par. 3, Article XIV, 1987
Constitution).
The donation is, likewise, exempt from the donor's tax if actually, directly and exclusively used for educational
purposes, provided not more than 30% of the donation is used by the donee for administration purposes. The
Page | 21

donee, being a non-stock, non-profit educational institution, is a qualified entity to receive an exempt donation
subject to conditions prescribed by law (Section 4 par. 4, Art. XIV, 1987 Constitution, in relation to Section
101(A)(3), NIRC).
Accordingly, none of the cited income and donation collected and received by the non-stock, non-profit
educational institution would not be exempt from taxation.
ALTERNATIVE ANSWER:
The following receipts by the non-stock, nonprofit educational institution are not exempt from taxation, viz:
(c) Rentals from canteen concessionaires. Rental income is considered as unrelated to the school operations;
hence, taxable (DOF Order No. 137-87, Dec. 16, 1987)
(d) Interest from money-market placements of the tuition fees. The interest on the placement is taxable (DOF
Order No. 137-87). If however, the said interest is used actually, directly and exclusively for educational
purposes as proven by substantial evidence, the same will be exempt from taxation (CIR v. CA, 298 SCRA 83
(1998)}.
The other items of income which were all derived from school-related activities will be exempt from taxation in
the hands of the recipient if used actually, directly and exclusively for educational purposes (Section 4 par. 3,
Article XIV, 1987 Constitution).
The donation to a non-stock, non-profit educational institution will be exempt from the donor’s tax if used
actually, directly and exclusively for educational purposes and provided, that, not more than 30% of the
donation is used for administration purposes (Section 4, par. 4, Art. XIV, 1987 Constitution if in relation to
Section 101(AX3), MRC).
Suppose that XYZ Colleges is a proprietary educational institution owned by the Archbishop’s family,
rather than the Archdiocese, which of those above cited income and donation would be exempt from
taxation? Explain briefly. (5%)
SUGGESTED ANSWER:
If XYZ Colleges is a proprietary educational institution, all of its income from school related and non-school
related activities will be subject to the income tax based on its aggregate net income derived from both
activities (Section 27(B)). Accordingly, all of the income enumerated in the problem will be taxable.
The donation of lot and building will likewise be subject to the donor’s tax because a donation to an educational
institution is exempt only if the school is incorporated as a non-stock entity paying no dividends.
Since the donee is a proprietary educational institution, the donation is taxable (Section 101(A)(3), NIRC) (BAR
2004)
5. XYZ Foundation is a non-stock, non-profit association duly organized for religious, charitable and social
welfare purposes. Last January 3. 2000 it sold a portion of its lot used for religious purposes and
utilized the entire proceeds for the construction of a building to house its free Day and Night Care
Center for children of single parents. In order to subsidize the expenses of the Day and Night Care
Center and to support its religious, charitable and social welfare projects, the Foundation leased the
300-square meter area of the second and third floors of the building for use as a boarding house. The
Foundation also operates a canteen and a gift shop within the premises, all the income from which is
used actually, directly, and exclusively for the purposes for which the Foundation was organized.
Considering the constitutional provision granting tax exemption to non-stock corporations such as
those formed exclusively for religious, charitable or social welfare purposes, explain the meaning of the
Page | 22

last paragraph of said Sec. 30 of the 1997 Tax Code which states that income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal, or from any of
their activities conducted for profit regardless of the disposition made of such income shall be subject
to tax imposed under this Code.” (5%)
SUGGESTED ANSWER:
The exemption contemplated in the Constitution covers real estate tax on real properties actually, directly and
exclusively used for religious, charitable or social welfare purposes. It does not cover exemption from the
imposition of the income tax which is within the context of Section 30 of the Tax Code. As a rule, non-stock nonprofit corporations organized for religious, charitable or social welfare purposes are exempt from income tax
on their income received by them as such. However, if these religious, charitable or social welfare corporations
derive income from their properties or any of their activities conducted for profit, the income tax shall be
imposed on said items of income irrespective of their disposition. (Sec. 30, NIRC; CIR v. YMCA, GR No. 124043,
1998). (BAR 2002)
Is the income derived by XYZ Foundation from the sale of a portion of its lot, rentals from its boarding
house and the operation of its canteen and gift shop subject to tax? Explain. (5%)
SUGGESTED ANSWER:
Yes. The income derived from the sale of lot and rentals from its boarding house are considered as income from
properties which are subject to tax. Likewise, the income from the operation of the canteen and gift shop is
income from its activities conducted for profit which are subject to tax. The income tax attaches irrespective of
the disposition of these incomes. (Sec. 30, NIRC; CIRv. YMCA, GR No. 124043, 1998). (BAR 2002)
6. Article VII, Section 28 (3) of the 1987 Philippine Constitution provides that charitable institutions,
churches and personages or covenants appurtenant thereto, mosques, non-profit cemeteries and all
lands, buildings and improvements actually, directly and exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.
To what kind of tax does this exemption apply? (2%)
SUGGESTED ANSWER:
This exemption applies only to property taxes. What is exempted is not the institution itself but the lands,
buildings and improvements actually, directly and exclusively used for religious, charitable and educational
purposes. (Commissioner of Internal Revenue v. Court of Appeals, et aL, G.R. No. 124043, October 14, 1998). (
Is proof of actual use necessary for tax exemption purposes under the Constitution? (3%)
SUGGESTED ANSWER:
Yes, because tax exemptions are strictly construed against the taxpayer. There must be evidence to show that
the taxpayer has complied with the requirements for exemption. Furthermore, real property taxation is based
on use and not on ownership, hence the same rule must also be applied for real property tax exemptions. BAR
2000)
7. The Constitution exempts from taxation charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries and lands, buildings and improvements
actually, directly and exclusively used for religious, charitable and educational purposes.
Mercy Hospital is a 100-bed hospital organized for charity patients. Can said hospital claim exemption
from taxation under the above-quoted constitutional provision? Explain.
ANSWER:
Page | 23

Yes. Mercy Hospital can claim exemption from taxation under the provision of the Constitution, but only with
respect to real property taxes provided that such real properties are used actually, directly and exclusively for
charitable purposes. (BAR 1996)
8. The University of Bigaa, a non-stock, non-profit entity, operates a canteen for its students and a
bookstore Inside the campus. It also operates two dormitories for its students, one of which is in the
campus.
Is the University liable to pay income taxes for the operation of the:
1) canteen?
2) bookstore?
3) two dormitories?
ANSWER:
1) For the operation of the canteen Inside the campus, the income thereon being incidental to the operations
of the University as a school, is exempt (Art. XIV (4) (3). Constitution; DECS Regulations No. 137-87, Dec.
16. 1987).
2) For the same reasons, the University of Bigaa is not liable to pay income taxes for the operation of the
bookstore, since this is an ancillary activity the conduct of which is carried out within the school premises.
3) The University of Bigaa shall not be liable to pay income taxes for the operation of the dormitory located in
the campus, for same reasons as the foregoing.
However, the latter shall be liable for Income taxes on income from operations of the dormitory located
outside the school premises. (BAR 1994)
9. Four Catholic parishes hired the services of Frank Binatra, a foreign non-resident entertainer, to
perform for four (4) nights at the Folk Arts Theater. Binatra was paid P200.000.00 a night. The
parishes earned PI,000,000.00 which they used for the support of the orphans in the city. Who are
liable to pay taxes?
ANSWER:
The following are liable to pay Income taxes:
The four catholic parishes because the income received by them, not being income earned “as such” in the
performance of their religious functions and duties, is taxable income under the last paragraph of Sec. 26, in
relation to Sec. 26(e) of the Tax Code. In promoting and operating the Binatra Show, they engaged in an activity
conducted for profit. (Ibid.)
The income of Frank Binatra, a non-resident alien under our law is taxable at the rate of 30%, final withholding
tax based on the gross income from the show. Mr. Binatra is not engaged in any trade or business in the
Philippines. (BAR 1994)
(5) Prohibition against taxation of non-stock, non-profit educational Institutions
1. XYZ Colleges is a non-stock, non-profit educational institution run by the Archdiocese of BP City. It
collected and received the following:
(f)
(g)
(h)
(i)

Tuition fees
Dormitory fees
Rentals from canteen concessionaires
Interest from money-market
Page | 24

(j)

Donation of a lot and building by school alumni

SUGGESTED ANSWER:
All of the Income derived by the non-stock, nonprofit educational institution will be exempt from taxation
provided they are used actually, directly and exclusively for educational purposes. The Constitution provides
that all revenues and assets of non-stock, non-profit educational institution which are actually, directly and
exclusively used for educational purposes are exempt from taxation (Section 4 par. 3, Article XIV, 1987
Constitution).
The donation is, likewise, exempt from the donor's tax if actually, directly and exclusively used for educational
purposes, provided not more than 30% of the donation is used by the donee for administration purposes. The
donee, being a non-stock, non-profit educational institution, is a qualified entity to receive an exempt donation
subject to conditions prescribed by law (Section 4 par. 4, Art. XIV, 1987 Constitution, in relation to Section
101(A)(3), NIRC).
Accordingly, none of the cited income and donation collected and received by the non-stock, non-profit
educational institution would not be exempt from taxation.
ALTERNATIVE ANSWER:
The following receipts by the non-stock, nonprofit educational institution are not exempt from taxation, viz:
(c) Rentals from canteen concessionaires. Rental income is considered as unrelated to the school operations;
hence, taxable (DOF Order No. 137-87, Dec. 16, 1987)
(d) Interest from money-market placements of the tuition fees. The interest on the placement is taxable (DOF
Order No. 137-87). If however, the said interest is used actually, directly and exclusively for educational
purposes as proven by substantial evidence, the same will be exempt from taxation (CIR v. CA, 298 SCRA 83
(1998)}.
The other items of income which were all derived from school-related activities will be exempt from taxation in
the hands of the recipient if used actually, directly and exclusively for educational purposes (Section 4 par. 3,
Article XIV, 1987 Constitution).
The donation to a non-stock, non-profit educational institution will be exempt from the donor’s tax if used
actually, directly and exclusively for educational purposes and provided, that, not more than 30% of the
donation is used for administration purposes (Section 4, par. 4, Art. XIV, 1987 Constitution if in relation to
Section 101(AX3), MRC).
Suppose that XYZ Colleges is a proprietary educational institution owned by the Archbishop’s family,
rather than the Archdiocese, which of those above cited income and donation would be exempt from
taxation? Explain briefly. (5%)
SUGGESTED ANSWER:
If XYZ Colleges is a proprietary educational institution, all of its income from school related and non-school
related activities will be subject to the income tax based on its aggregate net income derived from both
activities (Section 27(B)). Accordingly, all of the income enumerated in the problem will be taxable.
The donation of lot and building will likewise be subject to the donor’s tax because a donation to an educational
institution is exempt only if the school is incorporated as a non-stock entity paying no dividends.
Since the donee is a proprietary educational institution, the donation is taxable (Section 101(A)(3), NIRC) (BAR
2004)
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2. Under Article XIV, Section 4 (3) of the 1987 Philippine Constitution, all revenues and assets of nonstock, non-profit educational institutions, used actually, directly and exclusively for educational
purposes, are exempt from taxes and duties. Are income derived from dormitories, canteens
automatically exempt from taxation? Explain. (5%)
SUGGESTED ANSWER:
The income derived from dormitories, canteens and bookstores are not also automatically exempt from
taxation. There is still the requirement for evidence to show actual, direct and exclusive use for educational
purposes. It is to be noted that the 1987 Philippine Constitution does not distinguish with respect to the source
or origin of the income. The distinction is with respect to the use which should be actual, direct and exclusive
for educational purposes.
Consequently, the provisions of Sec. 30 of the NIRC of 1997, that a nonstock and nonprofit educational
institution is exempt from taxation only “in respect to income received by them as such" could not affect the
constitutional tax exemption. Where the Constitution does not distinguish with respect to source or origin, the
Tax Code should not make distinctions. (BAR 2000)
1. The University of Bigaa, a non-stock, non-profit entity, operates a canteen for its students and a
bookstore Inside the campus. It also operates two dormitories for its students, one of which is in the
campus.
Is the University liable to pay income taxes for the operation of the:
1) canteen?
2) bookstore?
3) two dormitories?
ANSWER:
1. For the operation of the canteen Inside the campus, the income thereon being incidental to the operations
of the University as a school, is exempt (Art. XIV (4) (3). Constitution; DECS Regulations No. 137-87, Dec.
16. 1987).
2. For the same reasons, the University of Bigaa is not liable to pay income taxes for the operation of the
bookstore, since this is an ancillary activity the conduct of which is carried out within the school premises.
3. The University of Bigaa shall not be liable to pay income taxes for the operation of the dormitory located in
the campus, for same reasons as the foregoing.
However, the latter shall be liable for Income taxes on income from operations of the dormitory located
outside the school premises. (BAR 1994)
(6) Majority vote of Congress for grant of tax exemption
(7) Prohibition on use of tax levied for special purpose
(8) President’s veto power on appropriation, revenue, tariff bills
(9) Non-impairment of jurisdiction of the Supreme Court
(10) Grant of power to the local government units to create its own sources of revenue
(11) Flexible tariff clause
1. Which of the following propositions may now be untenable:
1. The court should construe a law granting tax exemption strictly against the taxpayer.
2. The court should construe a law granting a municipal corporation the power to tax most strictly.
3. The Court of Tax Appeals has jurisdiction over decisions of the Customs Commissioner in cases
involving liability for customs duties.
4. The Court of Appeals has jurisdiction to review decisions of the Court of Tax Appeals.
Page | 26

5. The Supreme Court has jurisdiction to review decisions of the Court of Appeals.
Justify your answer or choice briefly. (5%)
SUGGESTED ANSWER:
2. The court should construe a law granting a municipal corporation the power to tax most strictly.
This proposition is now untenable. The basic rationale for the grant of tax power to local government units is to
safeguard their viability and self-sufficiency by directly granting them general and broad tax powers (Manila
Electric Company). Province of Laguna et. al 306 SCRA 750 [1999). Considering that inasmuch as the power to
tax may be exercised by local legislative bodies, no longer by valid congressional delegation but by direct
authority conferred by the Constitution, in interpreting statutory provisions on municipal fiscal powers, doubts
will, therefore, have to be resolved in favor of municipal corporations (City Government of San Pablo, Laguna v.
Reyes, 305 SCRA 353 (1999]). This means that the court must adopt a liberal construction of a law granting a
municipal corporation the power to tax.
Note:
Of the examinee chose proposition no. 4 as his answer, it should be given full credit considering that the
present CTA Act (R.A. No. 9282) has made the CTA a coequal judicial body of the Court of Appeals. The question
“Which of the following propositions may now be untenable" may lead the examinee to choose a proposition
which is untenable on the basis of the new law despite the cut-off date adopted by the Bar Examination
Committee. R.A. No. 9282 was passed on March 30, 2004. (BAR 2004)
2. May Congress, under the 1987 Constitution, abolish the power to tax of local governments?
SUGGESTED ANSWER:
No. Congress cannot abolish what is expressly granted by the fundamental law. The only authority conferred to
Congress is to provide the guidelines and limitations on the local government’s exercise of the power to tax
(Sec. 5, Art X, 1987 Constitution). (BAR 2003)
1. What do you understand by the term “flexible tariff clause" as used in the Tariff and Customs Code?
(5%)
SUGGESTED ANSWER:
The term "flexible tariff clause "refers to the authority given to the President to adjust tariff rates under Section
401 of the Tariff and Customs Code, which is the enabling law that made effective the delegation of the taxing
power to the President under the Constitution.
Note:
It is suggested that if the examinee cites the entire provision of Sec. 401 of the Tariff Customs Code, he should
also be given full credit. (BAR 2001)
2. In view of the unfavorable balance of payment condition and the increasing budget deficit, the
President of the Philippines. upon recommendation of the National Economic and Development
Authority, issues during a recess of Congress an Executive Order imposing an additional duty on all
imports at the rate of ten (10%) percent ad valorem. The Executive Order also provides that the same
shall take effect immediately. Ricardo San Miguel, an importer, questions the legality of the Executive
Order on the grounds that only Congress has the authority to fix the rates of import duties and, in any
event, such an Executive Order can take effect only thirty (30) days after promulgation and the
President has no authority to shorten said period.
Are the objections of Mr. San Miguel tenable?
Page | 27

ANSWER:
No. the objections are not tenable as the Executive Order cannot take effect “immediately". Being an “external”
law and having the effect of law, the Executive Order cannot become effective without publication, a
requirement of due process (Tanada vs. Tuvera, 136 SCRA27; Executive Order No. 202).
ALTERNATIVE ANSWER:
Under the Flexible Tariff Clause (Sec. 401, Tariff and Customs Code), any order issued by the President
thereunder can generally take effect only thirty (30) days after its issuance. In cases however of an order
imposing additional import duties, the law provides that the same can take effect immediately. (BAR 1991)
(12) Exemption from real property taxes
1. The Constitution provides “charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, and non-profit cemeteries and all lands, buildings, and improvements actually,
directly and exclusively used for religious, charitable or educational purposes shall be exempt from
taxation." This provision exempts charitable institutions and religious institutions from what kind of
taxes? Choose the best answer. Explain. 5%
a.
b.
c.
d.
e.

from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and real property tax
from income tax only
from value-added tax only
from real property tax only
from capital gains tax only

SUGGESTED ANSWER:
I choose (d), from real property tax only. This is the connotation of the phrase “and all lands, buildings and
improvements" thereby limiting the exemption to real property taxes only (CIRv. CA, 298 SCRA 83 [1998];
Lladoc v. Commissioner, 14 SCRA 292 [1967]; Hodges v. Municipal Board of Iloilo City, 19 SCRA 28 [1965]).
(BAR 2006)
2. The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac province. The southern side and
middle part are occupied by the Church and a convent, the eastern side by a school run by the Church
itself, the southeastern side by some commercial establishments, while the rest of the property, in
particular the northwestern side, is idle or unoccupied.
May the Church claim tax exemption on the entire land? Decide with reasons. (5%)
SUGGESTED ANSWER:
No. The portions of the land occupied and used by the church, convent and school run by the church are
exempt from real property taxes while the portion of the land occupied by commercial establishments and the
portion, which is idle, are subject to real property taxes. The “usage” of the property and not the “ownership" is
the determining factor whether or not the property is taxable. [Lung Center of the Philippines v. Q.C., 433 SCRA
119 (2004)]. (BAR 2005)
3. Article VII, Section 28 (3) of the 1987 Philippine Constitution provides that charitable institutions,
churches and personages or covenants appurtenant thereto, mosques, non-profit cemeteries and all
lands, buildings and improvements actually, directly and exclusively used for religious, charitable or
educational purposes shall be exempt from taxation.
To what kind of tax does this exemption apply? (2%)
SUGGESTED ANSWER:
Page | 28

This exemption applies only to property taxes. What is exempted is not the institution itself but the lands,
buildings and improvements actually, directly and exclusively used for religious, charitable and educational
purposes. (Commissioner of Internal Revenue v. Court of Appeals, et aL, G.R. No. 124043, October 14, 1998). (
Is proof of actual use necessary for tax exemption purposes under the Constitution? (3%)
SUGGESTED ANSWER:
Yes, because tax exemptions are strictly construed against the taxpayer. There must be evidence to show that
the taxpayer has complied with the requirements for exemption. Furthermore, real property taxation is based
on use and not on ownership, hence the same rule must also be applied for real property tax exemptions. BAR
2000)
4. The Constitution exempts from taxation charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries and lands, buildings and improvements
actually, directly and exclusively used for religious, charitable and educational purposes.
Mercy Hospital is a 100-bed hospital organized for charity patients. Can said hospital claim exemption
from taxation under the above-quoted constitutional provision? Explain.
ANSWER:
Yes. Mercy Hospital can claim exemption from taxation under the provision of the Constitution, but only with
respect to real property taxes provided that such real properties are used actually, directly and exclusively for
charitable purposes. (BAR 1996)
(13) No appropriation or use of public money for religious purposes
(14) Origin of Revenue and Tariff Bills
1. The House of Representatives Introduced HB 7000 which envisioned to levy a tax on various
transactions. After the bill was approved by the House, the bill was sent to the Senate as so required by
the Constitution. In the upper house, instead of a deliberation on the House Bill, the Senate introduced
SB 8000 which was its own version of the same tax. The Senate deliberated on this Senate Bill and
approved the same. The House Bill and the Senate Bill were then consolidated in the Bicameral
Committee. Eventually, the consolidated bill was approved and sent to the President who signed the
same. The private sectors affected by the new law questioned the validity of the enactment on the
ground that the constitutional provision requiring that all revenue bills should originate from the
House of Representatives had been violated.
Resolve the issue.
ANSWER:
There is no violation of the constitutional requirement that all revenue bills should originate from the House of
Representatives. What is prohibited is for the Senate to enact revenue measures on its own without a bill
originating from the House. But once the revenue bill was passed by the House and sent to the Senate, the latter
can pass its own version on the same subject matter consonant with the latter’s power to propose or concur
with amendments. This follows from the co-equality of the two chambers of Congress [Tolentino v. Secretary of
Finance, GR No. 115455, Oct. 30, 1995). (BAR 1997)
b. Provisions indirectly affecting taxation
(1) Due process
(2) Equal protection
1. What is the “rational basis” test? Explain briefly. (2%)
Page | 29

SUGGESTED ANSWER:
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, GR No.
163583, April 15, 2009).
2. The City of Manila enacted Ordinance No. 55-66 which imposes a municipal occupation tax on persons
practicing various professions in the city. Among those subjected to the occupation tax were lawyers.
Atty. Mariano Batas, who has a law office in Manila, pays the ordinance-imposed occupation tax under
protest. He goes to court to assail the validity of the ordinance for being discriminatory. Decide with
reasons. (3%)
SUGGESTED ANSWER:
The ordinance is valid. The ordinance is not discriminatory because it complies with the rule of equality and
uniformity in taxation. Equality and uniformity in local taxation means that all subjects or objects of taxation
belonging to the same class shall be taxed at the same rate within the territorial jurisdiction of the taxing
authority or local government unit and not necessarily in comparison with other units although belonging to
the same political subdivision. In fine, uniformity is required only within the geographical limits of the taxing
authority. It is not for the Court to judge what particular cities or municipalities should be empowered to
impose occupation tax. In the case at bar, the imposition of the occupation tax to persons exercising various
professions in the city is well within the authority ofthe City of Manila (Punsalanet. al. v. City of Manila, 95 Phil.
46 [1954]). (BAR 2009)
3. RC is a law-abiding citizen who pays his real estate taxes promptly. Due to a series of typhoons and
adverse economic conditions, an ordinance is passed by MM City granting a 50% discount for payment
of unpaid real estate taxes for the preceding year and the condonation of all penalties on fines resulting
from the late payment.
Arguing that the ordinance rewards delinquent taxpayers and discriminates against prompt ones, RC
demands that he be refunded an amount equivalent to one-half of the real taxes he paid. The municipal
attorney rendered an opinion that RC cannot be reimbursed because the ordinance did not provide for
such reimbursement. RC files suit to declare the ordinance void on the ground that it is a class
legislation. Will his suit prosper? Explain your answer briefly. (5%)
SUGGESTED ANSWER:
The suit will not prosper. The remission or condonation of taxes due and payable to the exclusion of taxes
already collected does not constitute unfair discrimination. Each set of taxes is a class by itself and the law
would be open to attack as class legislation only if all taxpayers belonging to one class were not treated alike
(Juan Luna Subdivision, Inc,, v, Sarmiento, 91 Phil, 371 (1952)] (BAR 2004)
4. A law was passed exempting doctors and lawyers from the operation of the value added tax. Other
professionals complained and filed a suit questioning the law for being discriminatory and violative of
the equal protection clause of the Constitution since complainants were not given the same exemption.
Is the suit meritorious or not? Reason briefly. (5%)
SUGGESTED ANSWER:
Yes, the suit is meritorious. The VAT is designed for economic efficiency; hence, should be neutral to those who
belong to the same class. Professionals ARE a class of taxpayers by themselves who, in compliance with the rule
of equality of taxation, must be treated alike for tax purposes. Exempting lawyers and doctors from a burden to
which other professionals are subjected will make the law discriminatory and violative of the equal protection
Page | 30

clause of the Constitution. While singling out a class for taxation purposes will not infringe upon this
constitutional limitation (Shell v. Vaho, 94 Phil. 389 [1954}), singling out a taxpayer from a class will no doubt
transgress the constitutional limitation (Ormoc Sugar Co. Inc., v. Treasurer of Ormoc City, 22 SCRA 603[1968D*
Treating doctors and lawyers as a different class of professionals will not comply with the requirements of a
reasonable, hence valid classification, because the classification is not based upon substantial distinction which
makes real differences. The classification does not comply with the requirement that it should be germane to
the purpose of the law either. (Pepsi-Cola Bottling Co., Inc. v. City of Butuan, 24 SCRA 789 [1968}).
ANOTHER ANSWER:
The suit is not meritorious. The equal protection clause of the Constitution merely requires that all persons
subjected to legislation shall be treated alike, under like circumstances and conditions, both in the privileges
conferred and in the liabilities imposed. The equality in taxation rule is not violated if classifications or
distinctions are made as long as the same are based on reasonable and substantial differences. (Pepsi-Cola
Bottling Co., Inc. v. City of Butuan, 24 SCRA 789 [1968]).
In the instant case, the professions of doctors and lawyers are not principally aimed at earning money but for
the service of the people. The exemption granted to doctors and lawyers from the operation of the VAT is
justified, as it is not discriminatory against the other professionals because they have reasonable and
substantial differences in the conduct of their professions. (BAR 2004)
5. An Executive Order was issued pursuant to law, granting tax and duty incentives only to businesses and
residents within the “secured area" of the Subic Economic Special Zone, and denying said incentives to
those who live within the Zone but outside such “secured area". Is the constitutional right to equal
protection of the law violated by the Executive Order? Explain. (3%)
SUGGESTED ANSWER:
No. Equal protection of the law clause is subject to reasonable classification. Classification, to be valid, must (1)
rest on substantial distinctions, (2) be germane to the purpose of the law, (3) not be limited to existing
conditions only, (4) apply equally to all members of the same class.
There are substantial differences between big Investors being enticed to the "secured area" and the business
operators outside that are in accord with the equal protection clause that does not require territorial
uniformity of laws. The classification applies equally to all the resident individuals and businesses within the
“secured area”. The residents, being in like circumstances to contributing directly to the achievement of the end
purpose of the law, are not categorized further. Instead, they are similarly treated, both in privileges granted
and obligations required. (Tiu, et al, v. Court of Appeals. et al, G.R. No. 127410, January 20. 19991 (BAR 2000)
(3) Religious freedom
(4) Non-impairment of obligations of contracts
1. A law was passed granting tax exemption to certain industries and investments for a period of five
years. But three years later, the law was repealed. With the repeal, the exemptions were considered
revoked by the BIR, which assessed the investing companies for unpaid taxes effective on the date of
the repeal of the law.
NPC and KTR companies questioned the assessments on the ground that, having made their
investments in full reliance with the period of exemption granted by the law, its repeal violated their
constitutional right against the impairment of the obligations and contracts. Is the contention of the
companies tenable or not? Reason briefly. (5%)
SUGGESTED ANSWER:
The contention is not tenable. The exemption granted is in the nature of a unilateral tax exemption. Since the
exemption given is spontaneous on the part of the legislature and no service or duty or other remunerative
conditions have been imposed on the taxpayers receiving the exemption, it may be revoked at will by the
Page | 31

legislature (Christ Church v. Philadelphia24 How. 300 [18601% What constitutes an impairment of the
obligation of contracts is the revocation of an exemption which is founded on a valuable consideration because
it takes the form and essence of a contract (Casanovas v. Hord, 8 PhiL 125 [1907]; Manila Railroad Company v.
Insular Collector of Customs, 12 PhiL 146 [1915)]. (BAR 2004)
2. "X" Corporation was the recipient in 1990 of two tax exemptions both from Congress, one law
exempting the company's bond issues from taxes and the other exempting the company from taxes in
the operation of its public utilities. The two laws extending the tax exemptions were revoked by
Congress before their expiry dates.
Were the revocations constitutional?
ANSWER:
Yes. The exempting statutes are both granted unilaterally by Congress In the exercise of taxing powers. Since
taxation is the rule and tax exemption, the exception, any tax exemption unilaterally granted can be withdrawn
at the pleasure of the taxing authority without violating the Constitution (Mactan Cebu International Airport
Authority v. Marcos, G.R No. 120082. September 11, 1996).
Neither of these were issued by the taxing authority in a contract lawfully entered by it so that their revocation
would not constitute an Impairment of the obligations of contracts.
ALTERNATIVE ANSWER:
No. The withdrawal of the tax exemption amounts to a deprivation of property without due process of law,
hence unconstitutional. (BAR 1997)
J.

Stages of taxation

1. Enumerate the 3 stages or aspects of taxation. Explain each. 5%
SUGGESTED ANSWER:
a. Levy. This refers to the enactment of a law by Congress authorizing the imposition of a tax.
b. Assessment and Collection. This is the act of administration and implementation of the tax law by the
executive through its administrative agencies.
c. Payment. This is the act of compliance by the taxpayer, including such options, schemes or remedies as may
be legally available to him. (BAR 2006)
1.
2.

Levy
Assessment and collection

1. Is the approval of the court, sitting as probate or estate settlement court, required in the enforcement
and collection of estate tax? Explain. (10%)
SUGGESTED ANSWER:
No. The approval of the court, sitting in probate, is not a mandatory requirement in the collection of estate tax.
On the contrary, under Section 94 of the NIRC, it is the probate or settlement court which is forbidden to
authorize the executor or judicial administrator of the decedent’s estate, to deliver any distributive share to
any party interested in the estate, unless a certification from the Commissioner of Internal Revenue that the
estate tax has been paid is shown. [Marcos U v. Court of Appeals, 273 SCRA 47 (1997)]. (BAR 2005)
2. VCC is the administrator of the estate of his father NGC, in the estate proceedings pending before the
MM Regional Trial Court. Last year, he received from the Commissioner of Internal Revenue a
deficiency tax assessment for the estate in the amount of PI, 000,000. But he ignored the notice. Last
Page | 32

month, the BIR affected a levy on the real properties of the estate to pay the delinquent tax. VCC filed a
motion with the probate court to stop the enforcement and collection of the tax on the ground that the
BIR should have secured first the approval of the probate court, which had jurisdiction over the estate,
before levying on its real properties. Is VCC’s contention correct? (5%)
SUGGESTED ANSWER:
No. VCC’s contention is not correct. The approval of the probate court is not necessary. Payment of estate taxes
is a condition precedent for the distribution of the properties of the decedent and the collection of estate taxes
is executive in nature for which the court is devoid of any jurisdiction. Hence, the approval of the court, sitting
in probate, or as a settlement tribunal is not a mandatory requirement in the collection of estate taxes (Marcos
H v. Court of Appeals, 273 SCRA 47 [1997]). (BAR 2004)
3.
4.

Payment
Refund

1. Can the Commissioner grant a refund or tax credit even without a written claim for it? (2%)
SUGGESTED ANSWER:
Yes. When the taxpayer files a return which on its face shows an overpayment of the tax and the option to
refund/ claim a tax credit was chosen by the taxpayer, the Commissioner shall grant the refund or tax credit
without the need for a written claim. This is so, because a return filed showing an overpayment shall be
considered as a written claim for credit or refund. (Secs. 76 and 204, NIRC). Moreover, the law provides that
the Commissioner may, even without a written claim therefore, refund or credit any tax where on the face of
the return upon which payment was made, such payment appears clearly to have been erroneously paid. ('Sec.
229, NIRC). (BAR 2002)
K. Definition, nature, and characteristics of taxes
L. Requisites of a valid tax
M. Tax as distinguished from other forms of exactions
N. Kinds of taxes
1. Distinguish “direct taxes” from “indirect taxes". Give examples. 5%
SUGGESTED ANSWER:
Direct taxes are demanded from the very person who, as intended, should pay the tax which he cannot shift to
another; while an indirect tax is demanded in the first instance from one person with the expectation that he
can shift the burden to someone else, not as a tax, but as part of the purchase price (Maceda v. Macaraig, Jr., 223
SCRA 217 [1993]). Examples of direct taxes are income tax, estate tax and donor’s tax. Examples of indirect
taxes are value-added tax, percentage tax and excise tax on excisable articles. (BAR 2006)
2. Distinguish direct taxes from indirect taxes, and give an example for each one. (2%)
SUGGESTED ANSWER:
Direct taxes are taxes wherein either the incidence (or liability for the payment of the tax) as well as the impact
or burden of the tax falls on the same person. An example of this tax is income tax where the person subject to
tax cannot shift the burden of the tax to another person.
Indirect taxes, on the other hand, are taxes wherein the incidence of or the liability for the payment of the tax
falls on one person but the burden thereof can be shifted or passed on to another person. Example of this tax is
the value-added tax. (Aban, Law of Basic Taxation p. 20).
Page | 33

ALTERNATIVE ANSWER:
A direct tax is a tax which is demanded from the person who also shoulders the burden of the tax. Example:
corporate and individual income tax. An indirect tax is a tax which is demanded from one person in the
expectation and intention that he shall indemnify himself at the expense of another and the burden finally
resting on the ultimate purchaser or consumer. Example: value added tax. (BAR 2001)
3. Among the taxes imposed by the Bureau of Internal Revenue are income tax, estate and donor’s tax,
value-added tax, excise tax, other percentage taxes, and documentary stamp tax. Classify these taxes
into direct and indirect taxes, and differentiate direct from indirect taxes. (5%)
SUGGESTED ANSWER:
Income tax, estate and donor's tax are considered as direct taxes. On the other hand, value-added tax, excise
tax, other percentage taxes, and documentary stamp tax are indirect taxes.
Direct taxes are demanded from the very person who, as intended, should pay the tax which he cannot shift to
another; while an indirect tax is demanded in the first instance from one person with the expectation that he
can shift the burden to someone else, not as a tax but as a part of the purchase price. (BAR 2000)
4. Distinguish a direct from an indirect tax.
ANSWER:
A direct tax is one in which the taxpayer who pays the tax is directly liable therefor, that is, the burden of paying the tax falls directly on the person paying the tax.
An indirect tax is one paid by a person who is not directly liable therefor, and who may therefore shift or pass
on the tax to another person or entity, which ultimately assumes the tax burden. (Maceda v. Macaraig. 197
SCRA 771) (BAR 1994)
II. National Internal Revenue Code (NIRC) of 1997, as amended

1. What kind of taxes, fees and charges are considered as National Internal Revenue Taxes under the
National Internal Revenue Code (NIRC)?
SUGGESTED ANSWER:
The following taxes, fees and charges are considered to be National Internal Revenue Taxes under the National
Internal Revenue Code:
a)
b)
c)
d)
e)
f)

Income tax;
Estate and donor’s taxes;
Value-added tax;
Other percentage taxes;
Excise taxes;
Documentary stamp taxes; and

Such other taxes as are or hereafter may be imposed and collected by the Bureau of Internal Revenue. (Section
21, NIRC). (BAR 2007)
A. Income taxation
1. Income tax systems
a. Global tax system
1. Discuss the meaning of the Global and Schedular systems of taxation.
Page | 34

ANSWER:
A global system of taxation is one where the taxpayer is required to lump up all items of income earned during
a taxable period and pay under a single set of income tax rules on these different items of Income.
A schedular system of taxation provides for a different tax treatment of different types of income so that a
separate tax return is required to be filed for each type of income and the tax is computed on a per return or
per schedule basis. (BAR 1997)
2. Distinguish “schedular treatment" from “global treatment" as used in income taxation.
ANSWER:
Distinction between “schedular treatment" and “global treatment’ as used in income taxation:
Under a schedular system, the various types/items of income (Le. compensation; business/professional
income) are classified accordingly and are accorded different tax treatments, in accordance with schedules
characterized by graduated tax rates. Since these types of income are treated separately, the allowable
deductions shall likewise vary for each type of income.
Under the global system, all income received by the taxpayer are grouped together, without any distinction as
to the type or nature of the income, and after deducting therefrom expenses and other allowable deductions,
are subjected to tax at a fixed rate. (BAR 1994)
b. Schedular tax system
1. Discuss the meaning of the Global and Schedular systems of taxation.
ANSWER:
A global system of taxation is one where the taxpayer is required to lump up all items of income earned during
a taxable period and pay under a single set of income tax rules on these different items of Income.
A schedular system of taxation provides for a different tax treatment of different types of income so that a
separate tax return is required to be filed for each type of income and the tax is computed on a per return or
per schedule basis. (BAR 1997)
2. Distinguish “schedular treatment" from “global treatment" as used in income taxation.
ANSWER:
Distinction between “schedular treatment" and “global treatment’ as used in income taxation:
Under a schedular system, the various types/items of income (Le. compensation; business/professional
income) are classified accordingly and are accorded different tax treatments, in accordance with schedules
characterized by graduated tax rates. Since these types of income are treated separately, the allowable
deductions shall likewise vary for each type of income.
Under the global system, all income received by the taxpayer are grouped together, without any distinction as
to the type or nature of the income, and after deducting therefrom expenses and other allowable deductions,
are subjected to tax at a fixed rate. (BAR 1994)
c. Semi-schedular or semi-global tax system
1. To which system would you say that the method of taxation under the National Internal Revenue Code
belongs?
Page | 35

ANSWER:
The method of taxation under the NIRC belongs to a system which is partly schedular and partly global. (BAR
1997)
2.

Features of the Philippine income tax law

1. What are the basic features of the present income tax system"?
ANSWER:
OUT present income tax system can be said to have the following basic features:
a. It has adopted a comprehensive tax situs by using the nationality, residence, and source rules. This
makes citizens and resident aliens taxable on their income derived from all sources while non-resident
aliens are taxed only on their income derived from within the Philippines. Domestic corporations are
also taxed on universal income while foreign corporations are taxed only on income from within.
b. The individual income tax system is mainly progressive in nature in that it provides a graduated rates
of income tax. Corporations in general are taxed at a flat rate of thirty five percent (35%) of net income.
c. It has retained more schedular than global features with respect to individual taxpayers but has
maintained a more global treatment on corporations.
Note:
The following might also be cited by the bar candidates as features of the income tax system:
a. Individual compensation income earners are taxed on modified gross income (Gross compensation
income less personal exemptions). Self-employed and professionals are taxed on net income with
deductions limited to seven items or in lieu thereof the forty percent (40%) maximum deduction plus
the personal exemptions. Corporations are generally taxed on net income except for non-resident
foreign corporations which are taxed on gross income.
b. The income tax is generally imposed via the self- assessment system or pay-as-you-file concept of
imposing the tax although certain incomes, including income of non-residents, are taxed on the pay-asyou-eam concept or the so called withholding tax.
c. The corporate income tax is a one-layer tax in that distribution of profits to stockholders (except to
non-residents are not subject to Income tax. (BAR 1996)
a. Direct tax
b. Progressive
c. Comprehensive
d. Semi-schedular or semi-global tax system
1. To which system would you say that the method of taxation under the National Internal Revenue Code
belongs?
ANSWER:
The method of taxation under the NIRC belongs to a system which is partly schedular and partly global. (BAR
1997)
3.

Criteria in imposing Philippine income tax
a. Citizenship principle
b. Residence principle
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c. Source principle
1. 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. (4%)
SUGGESTED ANSWER:
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 the 35% tax based on its
taxable income pursuant to Section 25(a)( 1) of the Tax Code of 1977. 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 from 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]).
Note: The taxable year involved in the problem is 1997, hence, the suggested answer above follows the
applicable provision of the old Tax Code (National Internal Revenue Code of1977) then in effect and the
prevailing jurisprudence on the matter. However, with the adoption of the National Internal Revenue Code
ofl997(RA 8424) which took effect on January 1, 1998, it is expected that the bar candidates have lost track of
the change in the tax law which transpired more than a decade ago. For this reason, it is respectfully requested
that an answer based on the provisions of the New Tax Code shall be given full credit. Accordingly, an answer
framed in this wise should also be considered as a correct answer, viz:
ANOTHER SUGGESTED ANSWER:
Yes. KIA is a non-resident foreign corporation which is taxable only on income from within. The income of KIA
as an international air carrier is derived from the sale of transportation services. Compensation for services is
an income from within if the services are performed in the Philippines (Section 42(A)(3), NIRC). The
origination of the flight is determinative of the source of the income of the international air carrier. If the flight
originates in the Philippines to a foreign destination, the income is an income from within; if it originates in a
foreign country to any destination, the income is from without. In the case at bar, no flight will originate from
the Philippines because KIA is not licensed to do business here. Hence, the income is not taxable in the
Philippines (Section 28(A)(3)(a), NIRC). (BAR 2009)
2. Caledonia Aircargo is an off-line international carrier without any flight operations in the Philippines.
It has, however, a liaison office in the Philippines which is duly licensed with the Securities and
Exchange Commission, established for the purpose of providing passenger and flight information,
reservation and ticketing services.
Are the revenues of Caledonia Aircargo from tickets reserved by its Philippine office subject to tax?
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ANSWER:
The revenues in the Philippines of Caledonia Aircargo as an “off-line'’ airline from ticket reservation services
are taxable income from “whatever source" under Sec. 28(a) of theTax Code. This case is analogous to
Commissioner v. BOAC. G.R No. No. 65773-74, April 30, 1987 where the Supreme Court ruled that the income
received in the Philippines from the sale of tickets by an “off-line" airline is taxable as Income from whatever
source. (BAR 1994)
3. Pacific, Inc. is engaged in overseas shipping. It time chartered one of its ships to a Japanese company on
a five- year term. The charter was consummated through the efforts of Kamino Moto, a Tokyo based
broker. The negotiation took place in Tokyo. The agreement calls for Pacific, Inc. to pay Kamino Moto
$50,000.00. Your opinion is sought whether Pacific, Inc. should withhold the tax before sending the
compensation of Kamino Moto.
ANSWER:
The compensation of Kamino Moto is not subject to withholding tax. Compensation for labor or personal
services performed outside the Philippines are considered as income from sources without the Philippines
(Sec. 36 (c) (3) and (a) (3). Kamino Moto’s efforts in consummating the Charter are a form of labor or services.
Considering further than Kamino Moto is a Tokyo based broker, presumably a non-resident foreign corporation, it is taxable only on income within the Philippines. Since the contract was consummated in Japan. Kamino
Moto’s compensation, therefore, is not subject to withholding tax.
ALTERNATIVE ANSWERS:
a) Taxes should not be withheld as the income was derived from an activity outside the country and.
therefore, from sources outside the Philippines. It has been held in Commissioner v. Japan Air Lines, 202
SCRA 450 that for the source of income to be considered as coming from the Philippines, it is sufficient that
the income is derived from activities within the country. The time chartering of the ship occurred outside
the Philippine territory. Therefore, income derived therefrom is not subject to income taxes that may be
withheld at source.
b) Kamino Moto is a non-resident alien not engaged in trade or business in the Philippines. According to

Section 25 of the NIRC, he is liable to pay income tax if the compensation paid by Pacific is compensation
income derived from sources within, the Philippines. However, the brokerage service of Kamino Moto was
rendered in Tokyo. Applying the source- rule in Section 36 of the NIRC, the income derived by the taxpayer
is income derived from sources outside the Philippines. Thus, the compensation of Kamino Moto is not
subject to Philippine income tax. Pacific Inc. should not withhold income tax on the payment. (BAR 1993)

4. Newtex International (Phils.) Inc. is an American firm duly authorized to engage in business in the
Philippines as a branch office. In its activity of acting as a buying agent for foreign buyers of shirts and
dresses abroad and performing liason work between its home office and the Filipino garment
manufacturers and exporters. Newt ex does not generate any income. To finance its office expenses
here, its head office abroad regularly remits to it the needed amount. To oversee its operations and
manage its office here, which had been in operation for two (2) years, the head office assigned three
(3) foreign personnel.
Are the three foreign personnel subject to Philippine income tax?
ANSWER:
The three (3) foreign personnel are subject to tax on the income that they receive for services rendered
in the Philippines. Non-resident aliens are subject to tax on income from sources within the
Philippines. Income is deemed derived from sources within the country when it is earned for services
rendered in the Philippines (Sec. 22. in relation to Sec. 36, NIRC). (BAR 1991)
4.

Types of Philippine income tax
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5.

Taxable period
a. Calendar period

1. An individual taxpayer can adopt either the calendar or fiscal period for purposes of filing his income
tax return.
SUGGESTED ANSWER:
FALSE. [Sec. 43, NIRC.]
b. Fiscal period
1. An individual taxpayer can adopt either the calendar or fiscal period for purposes of filing his income
tax return.
SUGGESTED ANSWER:
FALSE. [Sec. 43, NIRC.]
c. Short period
6. Kinds of taxpayers
a. Individual taxpayers
(1) Citizens
(2) Aliens
(3) Special class of individual employees
(iv) Minimum wage earner
b. Corporations
1. For failure to comply with certain corporate requirements, the stockholders of ABC Corp. were notified
by the Securities and Exchange Commission that the corporation would be subject to involuntary
dissolution. The stockholders did not do anything to comply with the requirements, and the
corporation was dissolved. Can the stockholders be held personally liable for the unpaid taxes of the
dissolved corporation? Explain briefly. (5%)
SUGGESTED ANSWER:
No. As a general rule, stockholders cannot be held personally liable for the unpaid taxes of a dissolved
corporation. The rule prevailing under our jurisdiction is that a corporation is vested bylaw with a personality
that is separate and distinct from those of the persons composing it (Sunio v. NLRC, 127 SCRA 390 [1984]).
Note:
Additional point should be given to the examinee if he answers in the following that:
However, stockholders may be held liable for the unpaid taxes of a dissolved corporation if it appears that the
corporate assets have passed into their hands (Tan Tiong Bio v. CIR, 4 SCRA 986 [1962D. Likewise, when
stockholders have unpaid subscriptions to the capital of the corporation they can be made liable for unpaid
taxes of the corporation to the extent of their unpaid subscriptions. (BAR 2004)
(i) Domestic corporations
(ii) Foreign corporations
(iii) Joint venture and consortium
1. 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.
Page | 39

a) Does the JVA entered into by and between Weber and Prime create a separate taxable entity?
Explain briefly.
SUGGESTED ANSWER:
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). (BAR 2007)
c. Partnerships
d. General professional partnerships
1. Five years ago Marquez, Peneyra, Jayme, Posadas and Manguiat, all lawyers, formed a partnership
which they named Marquez and Peneyra Law Offices. The Commissioner of Internal Revenue thereafter
issued Revenue Regulation No. 2-93 implementing RA. 7496 known as the Simplified Net Income
Taxation Scheme (SNITS). Revenue Regulation No. 2-93 provides in part:
“Sec. 6. General Professional Partnership. -The general professional partnership and the
partners are covered by RA. 7496. Thus, in determining profit of the partnership, only the direct costs
mentioned in said law are to be deducted from partnership income. Also, the expenses paid or incurred
by partners in their individual capacities in the practice of their profession which are not reimbursed
or paid by the partnership but are not considered as direct costs are not deductible from his gross
income.”
Is Revenue Regulation No. 2-93 now considered as having adopted a gross income method instead of
retaining the net income taxation scheme? Explain.
ANSWER:
No. Revenue Regulation No. 2-93 implementing RA No. 7496 have indeed significantly reduced the items of
deduction by limiting it to direct costs and expenses or the 40% of gross receipts maximum deduction in cases
where the direct costs are difficult to determine. The allowance of limited deductions however, is still in
consonance with the net income taxation scheme rather than the gross income method. While it is true that not
all the expenses of earning the income might be allowed, this can well be justified by the fact that deductions
are not matters of right but are matters of legislative grace. (BAR 1995)
e. Estates and trusts
1. 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. (3%)
SUGGESTED ANSWER:
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 (Section 61(A), NIRC).
[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? (3%)
SUGGESTED ANSWER:
Page | 40

No, the trustee has to pay the income tax on the trust’s net income determined annually if 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 o the beneficiary depending on the provision for distribution of income
following the one-layer taxation scheme (Section 61(A), NIRC). (BAR 2009)
f. Co-ownerships
1. 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 from 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 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 is-sued against each of them for the years 1989 to 1993, inclusive, as having entered into an
unregistered partnership. Were the assessments justified?
ANSWER:
Yes. the assessments were justified because for income tax purposes, the co-ownership of inherited property is
automatically converted into an unregistered partnership from the moment the said properties are used as a
common fund with Intent to produce profits for the heirs In proportion to their shares in the inheritance.
From the moment of such partition, the heirs are entitled already to their respective definite shares of the
estate and the income thereof, for each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly, he becomes liable individually for all taxes in connection
therewith. If after such partition, he allows his shares to be held in common with his co-heir under a single
management to be used with the intent of making profit thereby in proportion to his share, there can be no
doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed (Lorenzo Ona, et at v. CIR, 45 SCRA 74).
ALTERNATIVE ANSWER:
No. the assessments are not justified. The mere sharing of income does not of itself establish a partnership
absent any dear intention of the co-owners who are only awaiting liquidation of the estate. (BAR 1997)
2. Noel Langit and his brother, Jovy, bought a parcel of land which they registered in their names as pro
indiviso owners (Parcel A). Subsequently, they formed a partnership, duly registered with Securities
and Exchange Commission, which bought another parcel of land (Parcel B). Both parcels of land were
sold, realizing a net profit of PI,000,000.00 for parcel A and P500.000.00 for parcel B.
The BIR claims that the sale of parcel A should be taxed as a sale by an unregistered partnership. Is the
BIR correct?
ANSWER:
The BIR is not correct, since there is no showing that the acquisition of the property by Noel and Jovy Langit as
pro indiviso owners, and prior to the formation of the partnership, was used, intended for use, or bears any
relation whatsoever to the pursuit or conduct of the partnership business. The sale of parcel A shall therefore
not be treated as a sale by an unregistered partnership, but an ordinary sale of a capital asset, and hence will
be subject to the 5% capital gains tax and documentary stamp tax on transfers of real property, said taxes to be
borne equally by the co-owners.
ALTERNATIVE ANSWER:
The BIR is correct in treating the gain from the sale of parcel A by Noel and Jovy Langit at a profit of
PI,000,000.00. in the case of Pascual and Dragon u. Commissioner, G.R. No. 78133, October 18, 1988, the
Page | 41

Supreme Court ruled that the sharing of returns does not in itself establish a partnership, whether or not the
persons sharing therein have a joint or common right or interest in the property. The decision in said case
cannot be applied here because clearly the parties organized a partnership duly registered with the Securities
and Exchange Commission. They pooled their resources together with the purpose of dividing the profit
between them.
The BIR also claims that the sale of parcel B should be taxed as a sale by a corporation. Is the BIR
correct?
ANSWER:
The BIR is correct, since a “corporation” as defined under Section 20 (a) of the Tax Code Includes partnerships,
no matter how created or organized, except general professional partnerships. The business partnership. In
the Instant case, shall therefore be taxed in the same manner as a corporation on the sale of parcel B. The sale
shall thus be subject to the creditable withholding tax under Revenue Regulations 1-90, as amended by 12-94,
on the sale of parcel B, and the partnership shall report the gain realized from the sale when it files its income
tax return. (BAR 1994)
3. Roberto Ruiz and Conrado Cruz bought three (3) parcels of land from Rodrigo Sabado on 4 May 1976.
Then on 8 July 1977, they bought two (2) parcels of land from Miguel Sanchez. In 1988, they sold the
first three parcels of land to Central Realty, Inc. In 1989, they sold the two parcels to Jose Guerrero.
Ruiz and Cruz realized a net profit of P100,000.00 forthesalein 1988 and PI50,000.00for the sale in
1989. The corresponding capital gains taxes were individually paid by Ruiz and Cruz.
On 20 September 1990, however, Ruiz and Cruz received a letter from the Commissioner of Internal
Revenue assessing them deficiency corporate income taxes for the years 1988 and 1989 because,
according to the Commissioner, during said years they, as co-owners in the real estate transactions,
formed an unregistered partnership or joint venture taxable as a corporation and that the
unregistered partnership was subject to corporate income tax, as distinguished from profits derived
from the partnership by them, which is subject to individual income tax.
Are Robert Ruiz and Conrado Cruz liable for deficiency corporate income tax?
ANSWER:
Roberto Ruiz and Conrado Cruz are not liable for corporate income tax. Abandoning evidently the Gatchalian
rule, the Supreme Court in a recent ruling (Pascual vs. Court of Tax Appeals, G.R No. 78133, 18 Oct. 1988), held
that isolated transactions by two or more persons do not warrant their being considered as an unregistered
partnership. They will instead be considered as mere co-owners; no corporate income tax is due on mere coownerships. It was, therefore correct for Ruiz and Cruz to merely pay their individual income tax liabilities on
the real estate transactions. (BAR 1991)
7.

Income taxation
a. Definition
b. Nature
c. General principles

1. From what sources of income are the following persons/ corporations taxable by the Philippine
government?
1. Citizen of the Philippines residing therein; [1%]
2. Non-resident citizen; [1%]
3. An individual citizen of the Philippines who is working and deriving income from abroad as an
overseas contract worker; [1%]
4. An alien individual, whether a resident or not of the Philippines; [1%]
Page | 42

5. A domestic corporation; [1%)
SUGGESTED ANSWER:
(Section 23, NIRC of 1997)
1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and
without the Philippines.
2. A nonresident citizen is taxable only on income derived from sources within the Philippines.
3. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas
contract worker is taxable only on income from sources within the Philippines.
4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from
sources within the Philippines.
5. A domestic corporation is taxable on all income derived from sources within and without the
Philippines. (BAR 1998)
8.

Income
a. Definition
b. Nature
c. When income is taxable
(1) Existence of income
(2) Realization of income

1. 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.
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.
SUGGESTED ANSWER:
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, 2001).
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.
SUGGESTED ANSWER:
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) (BAR 2007)
2. On 03 January 1998, X, a Filipino citizen residing in the Philippines, purchased one hundred (100)
shares in the capital stock of Y Corporation, a domestic company. On 03 January 2000, Y Corporation
declared, out of the profits of the company earned after 01 January 1998, a hundred percent (100%)
stock dividends on all stockholders of record as of 31 December 1999 as a result of which X holding in Y
Corporation became two hundred (200) shares.
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Are the stock dividends received by X subject to income tax? Explain.
SUGGESTED ANSWER:
No. Stock dividends are not realized income. Accordingly, the different provisions of the Tax Code imposing a
tax on dividend income only includes within its purview cash and property dividends making stock dividends
exempt from income tax. However, if the distribution of stock dividends is the equivalent of cash or property,
as when the distribution results in a change of ownership interest of the shareholders, the stock dividends will
be subject to income tax. (Section 24(B)(2); Section 25(A)&(B); Section 28(B)(5)(b), 1997 Tax Code) (BAR
2003)
3. X-land Condominium Corporation was organized by the owners of units in X-land Building in
accordance with the Master Deed with Declaration of Restrictions. The X- land Building Corporation,
the developer of the building, conveyed the common areas in favor of the X-land Condominium
Corporation. Is the conveyance subject to any tax?
ANSWER:
The conveyance is not subject to any tax. The same is without consideration, and not in connection with a sale
made to X-land Condominium Corporation, and the purpose of the conveyance to the latter is for the
management of the common areas for the common benefit of the unit owners.
The same is not subject to income tax since no income was realized as a result of the conveyance, which was
made pursuant to the Condominium Act (R.A. No. 4626, and the purpose of which was merely to vest title to
the common areas in favor of the Land Condominium Corporation.
There being no monetary consideration, neither is the conveyance subject to the creditable withholding tax
imposed under Revenue Regulations 1-90, as amended.
The second conveyance was actually no conveyance at all because when the units were sold to the various
buyers, the common areas were already part and parcel of the sale of said units pursuant to the Condominium
Act. However, the Deed of Conveyance is subject to documentary stamp tax.
N.B. Documentary stamps tax and Condominium Law are excluded from the coverage of the Bar Examinations.
(BAR 1994)
4. Cebu Development Inc. (CDI) has an authorized capital stock of P5,000,000,00 divided into 50,000
shares with a par value of One Hundred Pesos (P100.00) per share. Of the authorized capital stock,
twenty-five thousand (25,000) shares have been subscribed. Mr. Juan Legaspi is a stockholder of CDI
where he has subscription amounting to 13,000 shares. To fully pay his unpaid subscription in the
amount of P950.000.00, Mr. Legaspi transferred to the corporation a parcel of land that he owns by
virtue of a Deed of Assignment. Upon investigation, the BIR discovered that Mr. Legaspi acquired said
property for only P500,000.00.
Is Mr. Legaspi liable for any taxable gain?
ANSWER:
The transfer by Mr. Legaspi to the corporation of the parcel of land in payment of his unpaid subscription did
not increase his stockholdings in the corporation. It cannot be said that he acquired control of the corporation
by virtue of the transfer of the land. His percentage of stockholdings in the capital stock of the corporation
remains the same after the transfer as before. Therefore, Mr. Legaspi derived taxable gain for his economic
gain which was realized by virtue of the exchange of the land for the liability for the subscription.
ALTERNATIVE ANSWER:
Mr. Legaspi is not liable for any taxable gain. The transaction amounted to an exchange of shares of property
Page | 44

for shares of stock as a result of which the property transferor acquired control of the corporation. The 13,000
shares of stock acquired in exchange of property was more than fifty percent (50%) of the total subscribed
capital stock of Cebu Development, Inc. (CDI) that qualified the transaction as a tax-exempt under the
provisions of Sec. 34 (c) (2) of the National Internal Revenue Code.
Is the CDI liable for any taxable gain?
ANSWER:
CDI Itself Is not liable for any taxable gain since subscription payments are not considered as taxable
income being merely investments in the corporation. However, a taxable incidence may occur as and
when the corporation sells the parcel of land for a price over and above the value of the shares of stock
or in this case over and above P950,000.00. Until such time, however, there is no realizable income on
the part of the corporation. (BAR 1991)
(3) Recognition of income
(4) Methods of accounting
d. Tests in determining whether income is earned for tax purposes
(1) Realization test
(2) Claim of right doctrine or doctrine of ownership, command, or control
1. Mr. Lajojo is a big-time swindler. In one year he was able to earn PI Million from his swindling
activities. When the Commissioner of Internal Revenue discovered his income from swindling, the
Commissioner assessed him a deficiency income tax for such income.
The lawyer of Mr. Lajojo protested the assessment on the following grounds:
1) The income tax applies only to legal income, not to illegal income:
2) Mr. Lajojo’s receipts from his swindling did not constitute income because he was under obligation
to return the amount he had swindled, hence, his receipt from swindling was similar to a loan,
which is not income, because for every peso borrowed he has a corresponding liability to pay one
peso; and
How will you rule on each of the three grounds for the protest? Explain.
ANSWER:
1) The contention that the income tax applies to legal income and not to illegal income is not correct. Section
28(a) of the Tax Code includes within the purview of gross income all income from whatever source
derived. Hence, the illegality of the income will not preclude the imposition of the income tax thereon.
The contention that the receipts from his swindling did not constitute income because of his obligation to
return the amount swindled is likewise not correct. When a taxpayer acquires earnings, lawfully or unlawfully,
without the consensual recognition, express or implied, of an obligation to repay and without restriction as to
their disposition, he has received taxable income, even though it may still be claimed that he is not entitled to
retain the money, and even though he may still be adjudged to restore its equivalent (James us. U.S.,366 U.S.
213, 1961). To treat the embezzled funds not as taxable Income would perpetuate injustice by relieving
embezzlers of the duty of paying income taxes on the money they enrich themselves with through
embezzlement, while honest people pay their taxes on every conceivable type of income. (Janies us. U.S.) (BAR
1995)
(3) Economic benefit test, doctrine of proprietary interest
(4) Severance test
(5) All events test
1. What is the “all event test”? Explain Briefly. (2%)
Page | 45

SUGGESTED ANSWER:
The “all events test” is a test applied in the realization of income and expense by an accrual-basic taxpayer. The
test requires (1) the fixing to the 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 I the
gross income or deductions during the taxable year. (CIR v. Isabela Cultural Corporation, GR No. 172231, Feb
12, 2007).
2. 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. (4%)
SUGGESTED ANSWER:
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 is determined with reasonable accuracy. The 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, SIS SCRA 556 [2007]). (BAR 2009)
9.

Gross income
a. Definition

1. Congress enacts a law imposing a 5% tax on the gross receipts of common carriers. The law does not
define the term “gross receipts". Express Transport, Inc., a bus company plying the Manila-Baguio
route, has time deposits with ABC Bank. In 2005, Express Transport earned PI Million interest, after
deducting the 20% final withholding tax from its time deposits with the bank. The BIR wants to collect
a 5% gross receipts tax on the interest income of Express Transport without deducting the 20% final
withholding tax. Is the BIR correct? Explain. 5%
SUGGESTED ANSWER:
Yes. The term “gross receipts” is broad enough to include income not physically received but constructively
received by the taxpayer. After all, the amount withheld is paid to the government on its behalf, in satisfaction
of its withholding taxes. The fact that it did not actually receive the amount does not alter the fact that it is
remitted for its benefit in satisfaction of its tax obligations. Since the income withheld is an income owned by
Express Transport, the same forms part of its gross receipts. (CIR v. Bank of Commerce, 459 SCRA 638 (20051;
CIR v. Solidbank Corp., 416 SCRA 436 [2003]; cm v. China Bank, 403 SCRA 634 [20030. (BAR 2006)
2. What is "gross income" for purposes of the Income tax?
ANSWER:
Gross Income means all income from whatever source derived, including (but not limited to) compensation for
services, including fees, commissions, and similar items; gross Income from business; gains derived from
dealings in property; interest: rents: royalties; dividends; annuities; prizes and winnings; pensions; and
partner’s distributive share of the gross income of general professional partnership (Sec. 28, NIRC).
ALTERNATIVE ANSWER:
Gross income means all wealth which flows into the taxpayer other than as a mere return of capital. It includes
the forms of income specifically described as gains and profits including gains derived from the sale or other
disposition of capital.
Page | 46

Gross income means Income (in the broad sense) less income which is, by statutory provision or otherwise,
exempt from the tax imposed by law (Sec. 36, Rev. Reg. No. 2) Gross income from business means total sales,
less cost of goods sold, plus any Income from investments and from incidental or outside operations or sources
(Sec. 43, Rev. Reg. No. 2). (BAR 1995)
3. How does “income" differ from “capital"? Explain.
ANSWER:
Income differs from capital in that income is any wealth which flows into the taxpayer other than a return of
capital while capital constitutes the Investment which is the source of income. Therefore, capital is fund while
income is the flow. Capital is wealth, while income is the service of wealth. Capital is the tree while income is
the fruit (Vicente Madrigal, et al v. James Rafferty, 38 Phil. 414). (BAR 1995)
4. In 1990, X started constructing a commercial building with spaces for lease to the public. X required Y,
a prospective lessee to sign a pre-lease agreement, which principally provided: (a) that the lessee shall
extend to the lessor a noninterest bearing loan of P100,000.00 payable within twelve (12) months: and
(b) that in consideration of the loan, the lessee shall be given preference in the lease and his rentals
shall not be increased while the loan remains unpaid. Upon completion of the building, Y extended the
loan ofP100.000.00 to X and he was given a space in its ground floor. May the BIR consider the
P100,000.00 as taxable income of X. Reasons.
ANSWER:
Sec. 28 of the NIRC defines gross income as all income from whatever source derived including but not limited
to the following items.
a)
b)
c)
d)
e)
f)
g)
h)
i)
j)
k)

Compensation for services, including fees, commissions, and similar items;
Gross income derived from business;
Gains derived from dealings in property:
Interest;
Rents;
Royalties;
Dividends;
Annuities
Prizes and winnings;
Pensions; and
Partner’s distributive share of the gross income of general professional partnership.

Further, under Sec. 36 of Revenue Regulations No. 2, taxable income in a broad sense means all wealth which
flows into the taxpayer other than as a mere return of capital. It includes the forms of the income specifically
described as gains and profits, including gains derived from the sale or other disposition of assets. Gross
income, means income (in the broad sense) less income which is by statutory provision or otherwise exempt
from the tax imposed by law.
Applying the above provision of law to the case at bar, the amount of P 100,000.00 being a loan or
indebtedness is an outlay, not a taxable income or gain. (BAR 1993)
ALTERNATIVE ANSWER:
The PI 00,000.00 may not be considered taxable income of X. as the same is only a loan that would eventually
have to be paid. To the extent that X saved in interest payments, the reasonable value thereof may perhaps be
considered as income to X. but the loan, however, may not strictly be considered interest-free as value therefor
was given by X in return.
b. Concept of income from whatever source derived
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c. Gross income vis-à-vis net income vis-à-vis taxable income
1. What is meant by taxable income? (2%)
SUGGESTED ANSWER:
Taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and/
or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other
special laws. (Sec. 31. NIRC of 1997) (BAR 2000)
d. Classification of income as to source
(1) Gross income and taxable income from sources within the Philippines
1. 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. (4%)
SUGGESTED ANSWER:
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 the 35% tax based on its
taxable income pursuant to Section 25(a)( 1) of the Tax Code of 1977. 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 from 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]).
Note: The taxable year involved in the problem is 1997, hence, the suggested answer above follows the
applicable provision of the old Tax Code (National Internal Revenue Code of1977) then in effect and the
prevailing jurisprudence on the matter. However, with the adoption of the National Internal Revenue Code
ofl997(RA 8424) which took effect on January 1, 1998, it is expected that the bar candidates have lost track of
the change in the tax law which transpired more than a decade ago. For this reason, it is respectfully requested
that an answer based on the provisions of the New Tax Code shall be given full credit. Accordingly, an answer
framed in this wise should also be considered as a correct answer, viz:
ANOTHER SUGGESTED ANSWER:
Yes. KIA is a non-resident foreign corporation which is taxable only on income from within. The income of KIA
as an international air carrier is derived from the sale of transportation services. Compensation for services is
an income from within if the services are performed in the Philippines (Section 42(A)(3), NIRC). The
origination of the flight is determinative of the source of the income of the international air carrier. If the flight
originates in the Philippines to a foreign destination, the income is an income from within; if it originates in a
foreign country to any destination, the income is from without. In the case at bar, no flight will originate from
Page | 48

the Philippines because KIA is not licensed to do business here. Hence, the income is not taxable in the
Philippines (Section 28(A)(3)(a), NIRC). (BAR 2009)
2. During the year, a domestic corporation derived the following items of revenue: (a) gross receipts from
a trading business: (b) interests from money placements in the banks; (c) dividends from its stock
investments in domestic corporations; (d) gains from stock transactions through the Philippine Stock
Exchange; (e) proceeds under an insurance policy on the loss of goods.
In preparing the corporate income tax return, what should be the tax treatment on each of the above
items?
ANSWER:
The gross receipts from trading business is includible as an item of income in the corporate income tax return
and subject to corporate income tax rate based on net income. The other items of revenue will not be included
in the corporate income tax return. The interest from money market placements is subject to a final
withholding tax of 20%; dividends from domestic corporation are exempt from income tax; and gains from
stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the
income tax. The proceeds under an insurance policy on the loss of goods is not an item of income but merely a
return of capital hence not taxable.
ALTERNATIVE ANSWER:
The gross receipts from trading business are includible as an item of income in the corporate income tax
return. Likewise, the gain or loss realized as a consequence of the receipt of proceeds under an insurance policy
on the loss of goods will be included in the corporate income tax return either as a taxable gain or a deductible
loss. The gain or loss is arrived at by deducting from the proceeds of insurance (amount realized) the basis of
the good lost (Sec. 34(a). NIRC). The net income of the corporation shall be subject to corporate income tax rate
of 35%.
The other items of revenue will not be included in the corporate income tax return. The interest from money
market placements is subject to a final withholding tax of 20%; dividends from Domestic Corporation are
exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to
transaction tax which is in lieu of the income tax. (BAR 1997)
(2) Gross income and taxable income from sources without the Philippines
1. 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 for
1997 on March 15.1998. After an audit of the 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. (2%)
SUGGESTED ANSWER:
The income of Mr. Sebastian as a seaman is considered as income of a non-resident citizen derived from
without the Philippines. The total gross income, in US dollars (or if in other foreign currency, its dollar
equivalent) from without shall be declared by him for income tax purposes using a separate income tax return
which will not include his income from business derived within (to be covered by another return). He is
entitled to deduct from his dollar gross income a personal exemption of $4,500 and foreign national Income
taxes paid to arrive at his adjusted income during the year. His adjusted income will be subject to the
graduated’ tax rates of 1% to 3%. (Sec. 21(b), Tax Code of 1986[PD 1158], as amended by PD 1994).
Page | 49

Note:
The bar candidates are not expected to be familiar with tax history. Considering that this is already the fourth
year of implementation of the Tax Code of 1997, bar candidates were taught and prepared to answer questions
based on the present law. It is therefore requested that the examiner be more lenient in checking the answers
to this question. Perhaps, an answer based on the present law be given full credit. (BAR 2002)
(3) Income partly within or partly without the Philippines
e. Sources of income subject to tax
(1) Compensation income
1. JR was a passenger of an airline that crashed. He survived the accident but sustained serious physical
injuries which required hospitalization for 3 months. Following negotiations with the airline and its
insurer, an agreement was reached under the terms of which JR was paid the following amounts: P500,
000.00 for his hospitalization: P250, 000.00 as moral damages: P300, 000.00 for loss of income during
the period of his treatment and recuperation. In addition, JR received from his employer the amount of
P200,000.00 representing the cash equivalent of his earned vacation and sick leaves.
Which, if any, of the amounts he received are subject to income tax? Explain. (5%)
SUGGESTED ANSWER:
The amount of P200,000.00 that JR received from his employer is subject to income tax except the money
equivalent of ten (10) days unutilized vacation leave credits which is not taxable. Amounts of vacation
allowances or sick leave credits which are paid to an employee constitutes compensation (Sec. 2.78(A)(7), RR
No. 2-98, as amended by RR No. 10-2000).
The amounts that JR received from the airline are excluded from gross income and not subject to income tax
because they are compensation for personal injuries suffered from an accident as well as damages received as a
result of an agreement (negotiation) on account of such injuries. (Sec. 32(B)(4), NIRC). (BAR 2005)
2. X, a multinational corporation doing business in the Philippines donated 100 shares of stock of said
corporation to Mr. Y, its resident manager in the Philippines.
Assuming the shares of stocks were given to Mr. Y in consideration of his services to the corporation,
what are the tax implications? Explain.
ANSWER:
If the shares of stocks were given to Mr. Y in consideration of his services to the corporation, the same shall
constitute taxable compensation income to the recipient because it is a compensation for services rendered
under an employer-employee relationship, hence, subject to income tax.
The par value or stated value of the shares issued also constitutes deductible expense to the corporation
provided it is subjected to withholding tax on wages. (BAR 1996)
3. Mr. Osorio, a bank executive, while playing golf with Mr. Perez, a manufacturing firm executive,
mentioned to the latter that his (Osorio) bank had just opened a business relationship with a big
foreign importer of goods which Perez' company manufactures. Perez requested Osorio to introduce
him to this foreign importer and put in a good word for him (Perez), which Osorio did. As a result, Perez
was able to make a profitable business deal with the foreign importer.
In gratitude Perez, in behalf of his manufacturing firm, sent Osorio an expensive car as a gift. Osorio
called Perez and told him that there was really no obligation on the part of Perez or his company, to
give such an expensive gift. But Perez insisted that Osorio keep the car. The company of Perez deducted
the cost of the car as a business expense.
Page | 50

The Commissioner of Internal Revenue included the fair market value of the car as income of Osorio
who protested that the car was a gift and therefore excluded from income.
Who is correct, the Commissioner or Osorio? Explain.
ANSWER:
The Commissioner is correct. The car having been given to Mr. Osorio in consideration of having introduced
Mr. Perez to a foreign Importer which resulted to a profitable business deal is considered to be a compensation
for services rendered. The transfer is not a gift because it is not made out of a detached or disinterested
generosity but for a benefit accruing to Mr. Perez. The fact that the company of Mr. Perez takes a business
deduction for the payment indicates that it was considered as a pay rather than a gift. Hence, the fair market
value of the car is includable in the gross Income pursuant to Section 28(a)(1) of the Tax Code (See 1974
Federal Tax Handbook, p. 145). A payment though voluntary, if it is in return for services rendered, or proceeds
from the constraining force of any moral or legal duty or a benefit to the payor is anticipated, is a taxable
income to the payee even if characterized as a ‘gift’ by the payor (Commissioner vs. Duberstein, 363 U.S. 278).
ALTERNATIVE ANSWER:
Mr. Osorio is correct. The car was not payment for services rendered. There was no prior agreement or
negotiations between Mr. Osorio and Mr. Perez that the former will be compensated for his services. Mr. Perez,
in behalf of his company, gave the car to Mr. Osorio out of gratitude. The transfer having been made
gratuitously should be treated as a gift subject to donor’s tax and should be excluded from the gross income of
the recipient, Mr. Osorio. The Commissioner should cancel the assessment of deficiency income tax to Mr.
Osorio and instead assess deficiency donor’s tax on Mr Perez’ company. (Sec. 28(b)(3), NIRC; Pirovano vs.
Commissioner. (BAR 1995)
4. Mr. Quiroz worked as chief accountant of a hospital for forty-five years. When he retired at 65 he
received retirement pay equivalent to two months’ salary for every year of service as provided in the
hospital BIR approved retirement plan.
The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was
provided for in the hospital's retirement plan in view of his loyalty and invaluable services for fortyfive years; hence, it resolved to pay him a gratuity of P1 Million over and above his retirement pay.
The Commissioner of Internal Revenue taxed the P1 Million as part of the gross compensation income
of Quiroz who protested that it was excluded from income because it was a gift.
Is Mr. Quiroz correct in claiming that the additional PI Million was gift and therefore excluded from
income? Explain.
ANSWER:
No. The amount received was in consideration of his loyalty and invaluable services to the company which is
clearly a compensation income received on account of employment. Under the employer’s ‘motivation test,’
emphasis should be placed on the value of Mr. Quiroz services to the company as the compelling reason for
giving him the gratuity, hence it should constitute a taxable income. The payment would only qualify as a gift if
there is nothing but ‘good will, esteem and kindness' which motivated the employer to give the gratuity.
(Stanton vs. U.S., 186 F. Supp. 393). Such is not the case in the herein problem.
ALTERNATIVE ANSWER:
Yes. The 1 million is not compensation income subject to income tax but a gift from his employer. There was no
evidence presented to show that he was not fully compensated for his 45 years of service. If his services
contributed in a large measure to the success of the hospital, it did not give rise to a recoverable debt. The PI
million is purely a gratuity from the company. It is a taxable gift to the transferor. Under the Tax Code, gifts are
Page | 51

excluded from gross income therefore exempt from income tax. (Sec. 28(b)(3). NIRC; Pirovano vs.
Commissioner) (BAR 1995)
5. In December 1993, the Sangguniang Bayan authorized a Christmas bonus of P3,000.00, a cash gift of
P5,000.00, and transportation and representation allowance ofP6,000.00 for each of the municipal
employees.
(a) Is the Christmas bonus subject to any tax?
(b) How about the cash gift?
(c) How about the transportation and representation allowances?
ANSWER:
(a) The Christmas bonus given by the Sangguniang Bayan to the municipal employees is taxable as
additional compensation (Sec. 21 (a). Tax Code).
(b) The cash gift per employee of P5.000.00 being substantial may be considered taxable also. They partake
the nature of additional compensation income as it is highly doubtful if municipal governments are
authorized to make gifts in substantial sums such as this. They are not furthermore gifts of “small value”
which employers might give to their employees on special occasions like Christmas - items which could
be exempt under BIR Revenue Audit Memo No. 1-87.
(c) The transportation and representation allowances are actually reimbursements for expenses incurred by
the employee for the employer. Said allowances spent by the employee for the employer are designed to
enhance the quality of the service that the employer is supposed to perform for its clientele like the
people of the municipality. (BAR 1994)
6. The employees of Travellers, Inc. staged a strike. X, a non-union, member joined the strike and
volunteered to picket the company premises from 8:00 A.M. to 12:00 P.M., Monday to Friday. Six
months into the strike. X ran out of money and asked financial aid from the union since he has no other
source of income and needed financial assistance in order to live. The union gave him PI ,000.00 a
month to take care of his food requirements plus P500.00 to take care of his monthly rent. When X filed
his return, he excluded these benefits from his gross income. The exclusion was denied by the BIR
Decide.
ANSWER:
The PI,500.00 is not compensation income because compensation income arises out of employer-employee
relationship as payment for services without compensation. The P1.500.00 is a gift from the labor union.
According to Section 28 (b) (3) of the NIRC, gifts are to be excluded from gross income. Thus, the BIR's denial is
not valid.
ALTERNATIVE ANSWER:
Under the law, gross Income consists of all gains, profits, and income of the taxpayer during a taxable year of
whatever kind and in whatever form derived from any source, whether legal or illegal, except items of gross
income subject to final income tax and income exempt from taxation under Sec. 28 (b) of the NIRC.
Moreover, in the case of Guitierrez vs. Collector of Internal Revenue. CTA Case No. 65. 31 August 1965, it was
held that the phrase income from whatever source derived covers all other forms of income. It discloses a
legislative policy to include all income not expressly exempted, as within the class of taxable income under our
laws, irrespective of the voluntary or involuntary action of the taxpayer in producing the gain.
Therefore based on the foregoing considerations, the benefits subject in the case at bar, not expressly
exempted by law, are considered as income. (BAR 1993)
7. Oriental, Inc. holds a proprietary share of Capital Gold Club, Inc. It assigned without any consideration
this share to X, one of its foreign consultants, to enable him to use its facilities for the duration of his
stay in the Philippines. X signed a Declaration of Trust where he acknowledged that the share is owned
by Oriental, Inc. and where he promised to transfer the same to whoever will succeed him as consultPage | 52

ant. When X’s contract with Oriental, Inc. expired, he left the Philippines and assigned for free the
share to Y, his successor in office. What tax, if any, can be imposed by the BIR on the transaction?
ANSWER:
The BIR cannot impose any tax because there was no real transfer of the ownership of the subject Capitol Golf
Club, Inc. (“Capitol”) proprietary share from X to Y. Oriental. Inc. is the true owner of the Capitol proprietary
share. It remained the true owner from the time of the Capitol share’s use by X, to the transfer of the Capitol
share’s use to Y. Oriental remained the legal owner thereof all throughout, while X and Y are only the beneficial
owners.
ALTERNATIVE ANSWERS:
a) The value of the use of the share may be considered compensation income to both X and Y subject to
income tax. The revocable trust may not be considered a disposition of a share of stock subject to capital
gains tax.
b) Since the transfer does not involve any consideration, X is not subject to income tax. While the transfer is
gratuitous, there is no donative intent. Thus, the transaction is not subject to donor’s tax. However, since
the certificate is evidence of interest in the Property of a corporation, the transfer of the said certificate is
subject to the documentary stamp tax of P0.20 on each P200 or fractional part thereof, of the face value of
such certificate, in accordance with Section 178 of the NIRC (BIR Ruling 235-89).
c) If the BIR puts value to the playing rights, then the transfer to the expatriate, that value could be treated as
compensation to the expatriate, hence, taxable. (BAR 1993)
8. ABC Computer Corp. purchased some years ago Membership,Certificate No. 7 from the Calabar Golf
Club, Inc. for P300.000.00. In 4 September 1985, it transferred the same to Mr. John Johnson, its
American computer consultant, to enable him to avail of the facilities of the Club during his stay here.
The consultancy agreement expired two (2) years later. In the meantime, the value of the Club share
appreciated and what was purchased by the corporation at P300,000.00, commanded a market value of
P800.000.00 in 1987. Before he returned home a few days after his tenure ended, Mr. Johnson
transferred the subject share to Mr. Robert James, the new consultant of the firm and the newly
designated playing representative, under a Deed of Declaration of Trust and Assignment of Shares
wherein the former acknowledged the absolute ownership of ABC Computer Corp. over the share, that
the assignment was without any consideration, and that the share was placed in his name because the
Club required it to be done.
Is the assignment/transfer of the shares from Johnson to James subject to Income tax?
ANSWER:
The assignment or transfer of shares from Johnson to James is not subject to income tax. There had been no
real change of ownership that took place. There having been no actual sale or exchange, no income tax
incidence can be said to have occurred, in addition, there was really no income realized or received
considering that in the Deed of Declaration of Trust and Assignment of Shares, the absolute ownership of ABC
Computer Corporation was explicitly recognized. (BAR 1991)
9. 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 month each.
Does the US$1,000 pension become taxable because he is now residing in the Philippines? Reason
briefly.
SUGGESTED ANSWER:
Page | 53

No, the US$1,000 pension is excluded from gross income because it is received by a Filipino resident or nonresident from a foreign private institution which under Section 32(B)(6) of the NIRC is excluded from gross
income.
Alternative Answer:
No, the US$1,000 pension is excluded from gross income because it is derived from sources outside of the
Philippines by a non-resident citizen. He may only be taxed for income from sources within the Philippines.
(Section 42[A][3] in relation to Section 23, NIRC) (BAR 2007)
10. 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 month each.
Will Z be liable to pay income tax on the P45.000 monthly income? Reason briefly.
SUGGESTED ANSWER:
Yes. The rental income from property located in the Philippines is considered as income derived from within. Z,
a non-resident citizen is taxable on income derived from sources within the Philippines. (Section 42 in relation
to Section 23, NIRC). (BAR 2007)
(2) Fringe benefits
1. 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 supervisors 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.
SUGGESTED ANSWER:
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 PI,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). (BAR 2007)
2. State with reasons the tax treatment of the following in the preparation of annual- income tax returns:
De minimis benefits;
SUGGESTED ANSWER:
De minimis benefits are non-taxable fringe benefits. They are not to be reported in the income tax return
because they are tax exempt. They are also exempt from the imposition of the fringe benefits tax. (Sec. 33(C),
NIRC). (BAR 2005)
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3. A “fringe benefit’ is defined as being any good, service or other benefit furnished or granted in cash or
in kind by an employer to an individual employee. Would it be the employer or the employee who is
legally required to pay an income tax on it? Explain.
SUGGESTED ANSWER:
It is the employer who is legally required to pay an income tax on the fringe benefit. The fringe benefit tax is
imposed as a final withholding tax placing the legal obligation to remit the tax on the employer, such that, if the
tax is not paid the legal recourse of the BIR is to go after the employer. Any amount or value received by the
employee as a fringe benefit is considered tax paid hence, net of the income tax due thereon. The person who is
legally required to pay (same as statutory incidence as distinguished from economic incidence) is that person
who, in case of non-payment, can be legally demanded to pay the tax. (BAR 2003)
4. X was hired by Y to watch over Y’s fishponds with a salary of Php 10,000.00. To enable him to perform
his duties well, he was also provided a small hut, which he could use as his residence in the middle of
the fishponds. Is the fair market value of the use of the small hut by X a "fringe benefit" that is subject to
the 32% tax imposed by Section 33 of the National Internal Revenue Code? Explain your answer. (5%)
SUGGESTED ANSWER:
No. X is neither a managerial nor a supervisory employee. Only managerial or supervisory employees are
entitled to a fringe benefit subject to the fringe benefits tax. Even assuming that he is a managerial or
supervisory employee, the small hut is provided for the convenience of the employer, hence does not constitute
a taxable fringe benefit. (Section 33, NIRC). (BAR 2001)
5. X is employed as a driver of a corporate lawyer and receives a monthly salary of P5,000.00 with free
board and lodging with an equivalent value of P1,500.00.
1) What will be the basis of X’s income tax.
2) Will your answer in question (a) be the same if X's employer is an obstetrician? Why?
ANSWER:
1) The basis of X’s income tax would depend on whether his employer is an employee or a practising
corporate lawyer. If his employer is an employee, the basis of X’s income tax is P6,500.00 equivalent to the
total of the basic salary and the value of the board and lodging. This is so because the employer/corporate
lawyer has no place of business where the free board and lodging may be given. On the other hand, if the
corporate lawyer is a practicing lawyer (self-employed), X should be taxed only on P5.000.00 provided that
the free board and lodging is given in the business premises of the lawyer and for his convenience and that
the free lodging was given to X as a condition for employment.
2) If the employer is an obstetrician who is self-employed, the basis of X’s income will only be P5.000.00 if it is
proven that the free board and lodging is given within the business premises of said employer for his
convenience and that the free lodging is required to be accepted by X as condition for employment.
Otherwise, X would be taxed on P6.500.00. (BAR 1996)
6. Mr. Adrian is an executive of a big business corporation. Aside from his salary, his employer provides
him with the following benefits: free use of a residential house in an exclusive subdivision, free use of a
limousine and membership in a country club where he can entertain customers of the corporation.
Which of these benefits, if any, must Mr. Adrian report as income? Explain.
ANSWER:
Mr. Adrian must report the imputed rental value of the house and limousine as income. If the rental value
exceeds the personal needs of Mr. Adrian because he is expected to provide accommodation in said house for
company guests or the car is used partly for business purpose, then Mr. Adrian is entitled only to a ratable
rental value of the house and limousine as exclusion from gross income and only a reasonable amount should
Page | 55

be reported as income. This is because the free housing and use of the limousine are given partly for the
convenience and benefit of the employer (Collector vs. Henderson).
ALTERNATIVE ANSWER:
Remuneration for service although not given in the form of cash constitutes compensation income.
Accordingly, the value for the use of the residential house is part of his compensation income which he must
report for income tax purposes. However, if the residential house given to Mr. Adrian for his free use as an
executive is also used for the benefit of the corporation/employer, such as for entertaining customers of the
corporation, only 50% of the rental value or depreciation (if the house is owned by the corporation) shall form
part of compensation income (RAMO 1-87).
The free use of a limousine and the membership in a country dub is not part of Mr. Adrian's compensation
income because they were given for the benefit of the employer and are considered to be necessary incidents
for the proper performance of his duties as an executive of the corporation.
The membership fee in the country club needs to be reported as income. It appears that the membership of Mr.
Adrian to the country club is primarily for the benefit and convenience of the employer. This is to enable Mr.
Adrian to entertain company guests (Collector vs. Henderson). (BAR 1995)
7. Capt. Canuto is a member of the Armed Forces of the Philippines. Aside from his pay as captain, the
government gives him free uniforms, free living quarters in whatever military camp he is assigned, and
free meals inside the camp.
Are these benefits income to Capt. Canuto? Explain.
ANSWER:
No, the free uniforms, free living quarters and the free meals inside the camp are not income to Capt. Canuto
because these are facilities or privileges furnished by the employer for the employer's convenience which are
necessary incidents to proper performance of the military personnel's duties. (BAR 1995)
8. X is employed as security guard of Excel Supermarket, Inc. X lives in a room within the compound of
Excel but he is not charged any rent. The rental value of the room is P300.00 a month. X wants your
opinion on whether BIR can tax the value of the free use of his room.
ANSWER:
The rental value of the room is not taxable. Section 2.2 of the Revenue Audit Memo Order No. 1-87 provides
that if the lodging is furnished in the business premises of the employer and the employee is required to accept
such lodging as a condition of his employment, then the value of said lodging will be not taxable. It is merely
for the convenience, comfort and pleasure of the employer.
ALTERNATIVE ANSWER:
a) The BIR may not tax the value of the free use of the room, as the same may not strictly be considered
compensation income. Considering the nature of X’s employment and the fact that free lodging was
furnished within the business premises, it may reasonably be said that the benefit therefrom inured to the
employer more than to X and thus may not actually be considered remuneration for services included in
the computation of taxable income.
b) It depends. If the lodging furnished to employee-X is within the business premises of the employer and the
employee is required to accept the lodging as condition for employment the imputed rental value of the
room used by X shall be excluded from X's compensation income (BIR Audit Memo 1-87). (BAR 1993)

(3) Professional income
(4) Income from business
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1. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for PI00,000. 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.
c) Is Alpha Corporation subject to income tax on the exchange of property? If so, what is the tax base
and rate? Explain. (3%)
SUGGESTED ANSWER:
c) Yes. The gain from the exchange constitutes an item of gross income, and being a business income, it must be
reported in the annual income tax return of Alpha Corporation. From the pertinent items of gross income,
deductions allowed by law from gross income can be claimed to arrive at the net income which is the tax
base for the corporate income tax rate of 35%. (Section 27 (A) and Section 31, NIRC). (BAR 2008)
(5) Income from dealings in property
1. Explain briefly whether the following items are taxable or non- taxable:
b) Gain arising from expropriation of property:
SUGGESTED ANSWER:
Taxable. There is a material gain, not excluded by law, realized out of a closed and completed transaction. Gains
from dealings in property are part of gross income. (Sec. 32(A)(3), NIRC).
e) Gain on the sale of a car used for personal purposes. (5%)
SUGGESTED ANSWER:
Gain on the sale of a car used for personal purposes is taxable. This is a gain derived from dealings in property
which is part of the taxpayer's gross income. (Sec. 32(A)(3), NIRC). There is a material gain, not excluded by
law, realized out of a closed and completed transaction. (BAR 2005)
2. State with reasons the tax treatment of the following in the preparation of annual- income tax returns:
Income realized from sale of (i) capital assets; and (ii) ordinary assets. (5%)
SUGGESTED ANSWER:
(i) Generally, income realized from the sale of capital assets are not to be reported in the income tax return as
they are already subject to final taxes (capital gains tax on real property and shares of stocks). What are to be
reported in the annual income tax return are the capital gains derived from the disposition of capital assets
other than real property or shares of stocks in domestic corporations which are not subject to final taxes.
(ii) Income realized from the sale of ordinary assets is taxable and the said income shall be declared in the
annual income tax return. The income constitutes either income derived from the conduct of trade or business
or a gain derived from dealings in property. (Sec. 32 A(2) and (3), NIRC). (BAR 2005)
(i) Types of properties
1. Distinguish a “capital asset" from an “ordinary asset".
SUGGESTED ANSWER:
The term “capital asset” regards all properties not specifically excluded in the statutory definition of
capital assets, the profits or loss on the sale or the exchange of which are treated as capital gains or
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capital losses. Conversely, all those properties specifically excluded are considered as ordinary assets
and the profits or losses realized must have to be treated as ordinary gains or ordinary losses.
Accordingly, “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 Section 34 (F) of the Tax Code or
(4) real property used in trade or business of the taxpayer.
The statutory definition of “capital assets” practically excludes from its scope, it will be noted, all property held
by the taxpayer if used in connection with his trade or business. (BAR 2003)
a) Ordinary assets
1. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for PI00,000. 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 (3%)
SUGGESTED ANSWER:
a) The one hectare agricultural land owned by Juan Gonzales is a capital asset because it is not a real property
used in trade or business. The one-half hectare residential property owned by Alpha Corporation is an
ordinary asset because the owner is engaged in the purchase and sale of real property. (Section 39, NIRC,
Revenue Regulations No. 7-03). (BAR 2008)
b) Capital assets
1. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for PI00,000. 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 (3%)
SUGGESTED ANSWER:
a) The one hectare agricultural land owned by Juan Gonzales is a capital asset because it is not a real property
used in trade or business. The one-half hectare residential property owned by Alpha Corporation is an
ordinary asset because the owner is engaged in the purchase and sale of real property. (Section 39, NIRC,
Revenue Regulations No. 7-03). (BAR 2008)
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2. In 1990, Mr. Naval bought a lot for PI,000,000.00 in a subdivision with the intention of building his
residence on it. In 1994, he abandoned his plan to build his residence on it because the surrounding
area became a depressed area and land values in the subdivision went down; instead, he sold it for
P800.000.00. At the time of the sale, the zonal value was P500.000.00.
1) Is the land a capital asset or an ordinary asset? Explain.
2) Is there any income tax due on the sale? Explain.
ANSWER:
1) The land is a capital asset because it is neither for sale in the ordinary course of business nor a property
used in the trade or business of the taxpayer. (Sec. 33. NIRC).
2) Yes. Mr. Naval is liable to the 5% capital gains tax imposed under Section 21(e) of the Tax Code based
on the gross selling price of P800.000.00 which is an amount higher than the zonal value. (BAR 1995)
(ii) Types of gains from dealings in property
a) Ordinary income vis-à-vis capital gain
1. What is the difference between capital gains and ordinary gains? [3%1
What does the term “ordinary income’ include? [2%]
SUGGESTED ANSWER:
1. Capital gains are gains realized from the sale or exchange of capital assets, while ordinary gains refer to
gains realized from the sale or disposition of ordinary assets.
2. The term ordinary income includes any gain from the sale or exchange of property which is not a
capital asset. These are the gains derived from the sale or exchange of property such as 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, or property held by the taxpayer primarily for sale
to customers in the course of his trade or business, or property used in trade or business of a character
which is subject to the allowance for depreciation, or real property used in trade or business of the
taxpayer. (Sec. 22[Z] in relation to Sec. 39(A)(1), both of the NIRC).
ALTERNATIVE ANSWER:
The term ordinary income includes income from performance of services, whether professional or personal,
gains accruing from business, and profit arising from the sale or exchange of ordinary assets. (BAR 1998)
2. X sold a piece of land to the United Church of Christ of Quezon City, Inc. The land is to be devoted
strictly for religious purposes by the Church. When the Church tried to register the title of the land, the
Register of Deeds refused claiming that the capital gains tax was not paid. Is the transaction exempt
from the capital gains tax? Reasons.
ANSWER:
No. Under Section 21 (e) in relation to Section 49 (a) (4) of the National Internal Revenue Code, the seller is the
one liable for the payment of the capital gains tax from the sale of real property by an individual taxpayer.
Meanwhile, the Church in this instant case is the buyer. Hence, Section 28 (4) of the 1987 Constitution, which
exempts church lands, buildings, and improvements, does not apply because the obligation to pay the capital
gains tax herein is imposed on X, the seller, and not on the Church. Since payment of the capital gains tax is a
condition precedent for the registration of the transfer certificate of title to real property, the nonpayment
herein by the seller is a valid reason for the Registry of Deeds to deny the transfer of title to the subject land.
ALTERNATIVE ANSWERS:
a) Assuming that in the hands of X, the piece of land is a capital asset, then the sale to the Church is subject to
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capital gains tax for which X is liable. It is immaterial that the land will be used exclusively for religious
purposes; if there is any exemption, then it applies to Church, and not to X, the vendor.
b) No. The tax exemption granted to churches in the Constitution refers to property tax and not to capital

gains tax which is an income tax. Besides, the capital gains tax is the liability of the seller X and not the
purchaser. (BAR 1993)
3. An individual taxpayer, who owns a ten (10) door apartment with a monthly rental of PI0.000 each
residential unit, sold this property to another individual taxpayer. Is the seller liable to pay the capital
gains tax? (5%)
SUGGESTED ANSWER:
No. The seller is not liable to pay the capital gains tax because the property sold is an ordinary asset, i.e. real
property used in trade or business. It is apparent that the taxpayer is engaged in the real estate business,
regularly renting out the ten (10) door apartment. (BAR 1998)
b)
c)
d)
e)

Actual gain vis-à-vis presumed gain
Long term capital gain vis-à-vis short-term capital gain
Net capital gain, net capital loss
Computation of the amount of gain or loss

1. Three brothers inherited in 1992 a parcel of land valued for real estate tax purposes at P3.0 million
which they held in co-ownership. In 1995, they transferred the property to a newly organized
corporation as 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, altogether, 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, who 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)?
ANSWER:
Yes. The exchange in 1995 is a tax-free exchange so that the subsequent sale of one of the brothers of his shares
to the other two (2) brothers in 1997 will be subject to income tax. This is so because the tax-free exchange
merely deferred the recognition of income on the exchange transaction. The gain subject to income tax in the
sale is measured by the difference between the selling price of the shares (P2 Million) and the basis of the real
property in the hands of the transferor at the time of exchange which is the fair market value of his share in the
real property at the time of inheritance (Section 34(b)(2), NIRC). The net gain from the sale of shares of stock is
subject to the schedular capital gains tax of 10% for the first PI00,000 and 20% for the excess thereof (Section
21(d), NIRC).
ALTERNATIVE ANSWER:
The exchange effected in 1995 did not qualify as a tax-free exchange because there is no showing that the three
brothers gained control of the corporation by acquiring at least 51% of the voting rights. Since the entire gain
on the exchange was previously subjected to income tax. Then, the sale will also be taxable if a gain results
therefrom. In the instant case, the sale will not be subject to any internal revenue tax other than the
documentary stamp tax, because the seller did not realize any gain from the safe. The gain is measured by the
difference between the amount realized (selling price) and the basis of the property. Incidentally, the basis to
him is his share in the value of the property received at the time of exchange, which is P2 Million, an amount.
Just equal to the amount realized from the sale. (BAR 1997)
2. In a qualified tax-free exchange of property for shares under Section 34 (c) (2) of the Tax Code, what is
the tax basis for computing the capital gains on: (a) the sale of the assets received by the Corporation:
and (b) the sale of the shares received by the stockholders in exchange of the assets?
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ANSWER:
In a qualified tax free exchange of property for shares under Section 34 (c) (2) of the Tax Code, the tax basis for
computing the gain on the:
a) Sale of the assets received by the corporation shall be the original/historical cost (Le. purchase price plus
expenses of acquisition) of the property/assets given in exchange of the shares of stock.
b) Sale of the shares of stock received by the stockholders In exchange of the assets shall be the
original/historical cost of the property given in exchange of the shares of stock.
ALTERNATIVE ANSWER:
The basis in computing capital gains tax in a qualified tax-free exchange under Sec. 34 (c) (2) is:
(a) With respect to the asset received by the corporation the same as it would be in the hands of the
transferor increased by the amount of the gain recognized to the transferor on the transfer.
(b) With respect to the shares received by the stockholders in exchange of the assets - the same as the basis
of the property, stock or securities exchanged, decreased by the money received and the fair market
value of the other property received, and increased by the amount treated as dividend of the shareholder
and the amount of any gain that was recognized on the exchange.

In a qualified merger under Section 34 (c) (2) of the Tax Code, what is the tax basis for computing the
capital gains on: (a) the sale of the assets received by the surviving corporation from the absorbed
corporation; and (b) the sale of the shares of stock received by the stockholders from the surviving
corporation?
ANSWER:
In a qualified merger under Section 34 (c) (2) of the Tax Code, the tax basis for computing the capital gains on:
(a) The sale of the assets received by the surviving corporation from the absorbed corporation shall be the
original/historical cost of the assets when still in the hands of the absorbed corporation.
(b) The sale of the shares of stock received by the stockholders from the surviving corporation shall be the
acquisition/historical cost of assets transferred to the surviving corporation. (BAR 1994)

f) Income tax treatment of capital loss
(a) Capital loss limitation rule (applicable to both corporations and
individuals)
1. 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 PI,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 PI ,000,000.00.
In its 2009 Return, the corporation indicated its option to claim for refund the total income tax
overpayment of PI,500,000.00
Choose which of the following statements is correct.
a.

Mirador, Inc. may claim as refund the total income tax overpayment of PI,500,000.00
reflected in its income tax return for its taxable year 2009;
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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. (5%)
ANSWER:
It may claim as refund the amount of P500,000 representing its income tax overpayment for its taxable year
2009.
(b) Net loss carry-over rule (applicable only to individuals)

g) Dealings in real property situated in the Philippines
h) Dealings in shares of stock of Philippine corporations
(c) Shares listed and traded in the stock exchange
(d) Shares not listed and traded in the stock exchange
i) Sale of principal residence
1. Last July 12, 2000, Mr. & Mrs. Peter Camacho sold their principal residence situated in Tandang Sora,
Quezon City for Ten Million Pesos (PI0,000,000.00) with the intention of using the proceeds to acquire
or construct a new principal residence in Aurora Hills, Baguio City.
What conditions must be met in order that the capital gains presumed to have been realized from such
sale may not be subject to capital gains tax? (5%)
SUGGESTED ANSWER:
The conditions are:
1. The proceeds are fully utilized in acquiring or constructing a new principal residence within eighteen
(18) calendar months from the sale or disposition of the principal residence or eighteen (18) months
from July 12. 2000.
2. The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the
new principal residence built or acquired.
3. The Commissioner of Internal Revenue must have been informed by Mr. & Mrs. Peter Camacho within
thirty (30) days from the date of sale or disposition on July 12, 2000 through a prescribed return of
their intention to avail of the tax exemption.
4. That the said exemption can only be availed of once every ten (10) years.
5. If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to
have been realized from the sale or disposition shall be subject to capital gains tax. (Sec. 24 (D) (2).
NIRC of 1997) (BAR 2000)
(iii) Passive investment income
a) Interest income
1. State with reasons the tax treatment of the following in the preparation of annual- income tax returns:
Interest on deposits with (i) BPI Family Bank; and (ii) a local offshore banking unit of a foreign bank;
SUGGESTED ANSWER:
Interest on deposit with BPI Family Bank is a passive income subject to a final withholding tax rate of 20%; the
interest on deposit with a local offshore banking unit of a foreign bank is a passive income subject to a final
Page | 62

withholding tax rate of 7.5%. (Sec. 24(B)(1), NIRC). Both interest incomes are not to be declared as part of
gross income in the income tax return. (BAR 2005)
2. Under Article XIV, Section 4 (3) of the 1987 Philippine Constitution, all revenues and assets of nonstock, non-profit educational institutions, used actually, directly and exclusively for educational
purposes, are exempt from taxes and duties. Are income derived from interest on bank deposits and
yields from deposit substitutes automatically exempt from taxation? Explain. (5%)
SUGGESTED ANSWER:
No. The interest income on bank deposits and yields from deposit substitutes are not automatically exempt
from taxation. There must be a showing that the incomes are included in the school’s annual information
return and duly audited financial statements together with:
i.

Certifications from depository banks as to the amount of interest income earned from passive
investments not subject to the 20% final withholding tax;

ii.

Certification of actual, direct and exclusive utilization of said income for educational purposes;

iii.

Board resolution on proposed project to be funded out of the money deposited in banks or placed in
money market placements (Finance Department Order No. 149-95 issued November 24, 1995),
which must be used actually, directly and exclusively for educational purposes. (BAR 2000)

3. During the year, a domestic corporation derived the following items of revenue: (a) gross receipts from
a trading business: (b) interests from money placements in the banks; (c) dividends from its stock
investments in domestic corporations; (d) gains from stock transactions through the Philippine Stock
Exchange; (e) proceeds under an insurance policy on the loss of goods.
In preparing the corporate income tax return, what should be the tax treatment on each of the above
items?
ANSWER:
The gross receipts from trading business is includible as an item of income in the corporate income tax return
and subject to corporate income tax rate based on net income. The other items of revenue will not be included
in the corporate income tax return. The interest from money market placements is subject to a final
withholding tax of 20%; dividends from domestic corporation are exempt from income tax; and gains from
stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu of the
income tax. The proceeds under an insurance policy on the loss of goods is not an item of income but merely a
return of capital hence not taxable.
ALTERNATIVE ANSWER:
The gross receipts from trading business are includible as an item of income in the corporate income tax
return. Likewise, the gain or loss realized as a consequence of the receipt of proceeds under an insurance policy
on the loss of goods will be included in the corporate income tax return either as a taxable gain or a deductible
loss. The gain or loss is arrived at by deducting from the proceeds of insurance (amount realized) the basis of
the good lost (Sec. 34(a). NIRC). The net income of the corporation shall be subject to corporate income tax rate
of 35%.
The other items of revenue will not be included in the corporate income tax return. The interest from money
market placements is subject to a final withholding tax of 20%; dividends from Domestic Corporation are
exempt from income tax; and gains from stock transactions with the Philippine Stock Exchange are subject to
transaction tax which is in lieu of the income tax. (BAR 1997)
b) Dividend income
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1. State with reasons the tax treatment of the following in the preparation of annual- income tax returns:
Dividends received by a domestic corporation from a foreign corporation;
SUGGESTED ANSWER:
Dividends received by a domestic corporation from a foreign corporation is subject to income tax and shall
form part of the gross income. There is no law exempting this type of dividend from income tax. (Section 32 (7),
NIRC). (BAR 2005)
2. On 03 January 1998, X, a Filipino citizen residing in the Philippines, purchased one hundred (100)
shares in the capital stock of Y Corporation, a domestic company. On 03 January 2000, Y Corporation
declared, out of the profits of the company earned after 01 January 1998, a hundred percent (100%)
stock dividends on all stockholders of record as of 31 December 1999 as a result of which X holding in Y
Corporation became two hundred (200) shares.
Are the stock dividends received by X subject to income tax? Explain.
SUGGESTED ANSWER:
No. Stock dividends are not realized income. Accordingly, the different provisions of the Tax Code imposing a
tax on dividend income only includes within its purview cash and property dividends making stock dividends
exempt from income tax. However, if the distribution of stock dividends is the equivalent of cash or property,
as when the distribution results in a change of ownership interest of the shareholders, the stock dividends will
be subject to income tax. (Section 24(B)(2); Section 25(A)&(B); Section 28(B)(5)(b), 1997 Tax Code) (BAR
2003)
3. What is disguised dividends in income taxation? Give an example.
SUGGESTED ANSWER:
Disguised dividends are those income payments made by a domestic corporation, which is a subsidiary of a
non-resident foreign corporation, to the latter ostensibly for services rendered by the latter to the former, but
which payments are disproportionately larger than the actual value of the services rendered. In such case, the
amount over and above the true value of the service rendered shall be treated as a dividend, and shall be
subjected to the corresponding tax of 35% on Philippine sourced gross income, or such other preferential rate
as may be provided under a corresponding Tax Treaty.
Example: Royalty payments under a corresponding licensing agreement. (BAR 1994)
4. Gains realized by the investor upon redemption of shares of stock in a mutual fund company are
exempt from income tax.
SUGGESTED ANSWER:
TRUE [Sec 32(B)(7)(h),NIRC]
c) Royalty income
1. 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. (5%)
SUGGESTED ANSWER:
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The amount payable under the agreement is in the nature of a 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 the 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).
2. The MKB-Phils. is a BOI-registered domestic corporation licensed by the MKB of the United Kingdom to
distribute, support and use in the Philippines its computer software systems, including basic and
related materials for banks. The MKB-Phils. provides consultancy and technical services incidental
thereto by entering into licensing agreements with banks. Under such agreements, the MKB-Phils. will
not acquire any proprietary rights in the licensed systems. The MKB-Phils. pays royalty to the MKB-UK,
net of 15% withholding tax prescribed by the RP-UK Tax Treaty.
Is the income of the MKB-Phils. under the licensing agreement with banks considered royalty subject to
20% final withholding tax? Why? If not, what kind of tax will its income be subject to? Explain. (5%)
SUGGESTED ANSWER:
Yes. The income of MKB-Phils. under the licensing agreement with banks shall be considered as royalty subject
to the 20% final withholding tax. The term royalty is broad enough to include technical advice, assistance or
services rendered in connection with technical management or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme. (Sec. 42(4)(f), NIRC). Accordingly, the consultancy and
technical services rendered by MKB-Phils. which are incidental to the distribution, support and use of the
computer systems of MKB-UK are taxable as royalty. (BAR 2002)
d) Rental income
(1) Lease of personal property
(2) Lease of real property
(3) Tax treatment of
(a) Leasehold improvements by lessee
(b) VAT added to rental/paid by the lessee
(c) Advance rental/long term lease
(iv) Annuities, proceeds from life insurance or other types of insurance
1. Born of a poor family on 14 February 1944. Mario worked his way through college. After working for
more than 2 years in X Manufacturing Corporation, Mario decided to retire and avail of the benefits
under the very reasonable retirement plan maintained by his employer. He planned to invest whatever
retirement benefits he would receive in a business that will provide his employer with the needed raw
materials. On the day of his retirement on 30 April 1985. he received P400.000.00 as retirement
benefit. In addition, his endowment insurance policy, for which he was paying an annual premium of
PI.520.00 since 1965. also matured. He was then paid the face value of his insurance policy in the
amount of P50.000.00.
Is his P50.000.00 insurance proceeds exempt from income taxation?
ANSWER:
The P50.000.00 insurance proceeds is not totally exempt from income tax. The excluded amount is only that
portion which corresponds to the premiums that he had paid since 1965. At the rate of PI,520.00 per year
multiplied by twenty (20) years which was the period of the policy, he must have paid a total of P30.400.00.
Accordingly, he will be subject to report as taxable income the amount of P 19,600.00 (Sec. 28. NIRC) (BAR
1991)
(v) Prizes and awards
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1. Jose Miranda, a young artist and designer, received a prize of P100.000.00 for winning in the on-thespot peace poster contest sponsored by a local Lions Club. Shall the reward be included in the gross
income of the recipient for tax purposes? Explain. (3%)
SUGGESTED ANSWER:
No. It is not includable in the gross income of the recipient because the same is subject to a final tax of 20%, the
amount thereof being in excess of P10.000 (Sec. 24(B)(1), NIRC of 1997). The prize constitutes a taxable
income because it was made primarily in recognition of artistic achievement which he won due to an action on
his part to enter the contest. [Sec. 32 (B) (7) (c), NIRC of 1997] Since it is an on-the-spot contest, it is evident
that he must have joined the contest in order to earn the prize or award. (BAR 2000)
2. Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council, a
sports association duly accredited by the Philippine Boxing Association. Onyoc received the amount of
P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to collect income
tax on the amount received by Onyoc and donor’s tax from Ayala Land Corporation, which taxes, Onyoc
and Ayala Land Corporation refuse to pay. Decide.
ANSWER:
The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the income
tax. RA. No. 7549 explicitly provides that “All prizes and awards granted to athletes in local and International
sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective
national sports associations shall be exempt from income tax".
Neither is the BIR correct in collecting the donor’s tax from Ayala Land Corporation. The law is clear when it
categorically stated “That the donor’s of said prizes and awards shall be exempt from the payment of the
donor’s tax." (BAR 1996)
3. Evelyn is a graduate student of U.P. In January, 1991, she won the Palanca Award for an outstanding
short story she wrote. The award was P25.000.00 in cash. In February, 1991, she was also named most
Valuable Player of the Varsity volleyball team and she was given a trophy plus P10.000.00. Finally, in
March, 1991, she received a Fellowship Award from the University of California to pursue a master's
degree in American literature. The fellowship is for $10,000.00 plus freeboard and lodging for two (2)
semesters. Should Evelyn include these awards and fellowship in her gross income? Reasons.
ANSWER:
Gross income includes prizes and winnings (Section 27 of the National Internal Revenue Code [“NIRC"), except
those stated in Section 28 B, (8), (E) of the NIRC, to wit:
“(E) Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic,
literary, or civil achievement but only if:
(i)
(ii)

The recipient was selected without any action on his part to enter the contest or proceeding: and
The recipient is not required to render substantial future services as a condition to receiving the prize or
award.

The first award granted to Evelyn was a Palanca award. This kind of award requires submission of literary
works. Hence, this is included in the gross income because it fails to meet the legal requisites provided for in
the aforequoted provisions of law specifically item (i).
The second award granted to Evelyn was the Most Valuable Player Award. In this kind of award, Evelyn did not
file any application to enter into any contest. The award was given to her in recognition for her outstanding
performance in the field of sports. However, the recognition in the field of sports is not among those stated in
the aforequoted provision of law. Thus, the award granted to her does not fall under the aforequoted provision
of law.
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The last award granted to her was the Fellowship Award. This requires also submission of application to
qualify for such award. Hence, it fails to meet the necessary requisites of the aforequoted provision of law
specifically item (i).
ALTERNATIVE ANSWERS:
a) The award of P25.000.00 should be Included in Evelyn's gross Income for while it was earned as a prize for
literaiy achievement, it cannot be said that she won without any action on her part to enter the contest. Her
P100.000.00 prize as Most Valuable Player cannot be excluded for the same reason. Both awards, however,
may be considered income subject to income tax.
The fellowship award of $10,000.00 is, however, excluded from her income as she was selected therefor
without any action on her part and the same was given to her in recognition of literaiy and educational
achievement, presumably without her being required to render future services for the grantor.
b) It depends. Section 28 (b) (8,E) of the NIRC enumerates the requirements in order to exclude the item from

taxation. The Tax Code requires that the prizes and awards are given primarily in recognition of religious,
charitable, scientific, educational, artistic, literary or civil achievements. The awards mentioned were given
to the taxpayer in recognition of her literary achievement in the case of the Palanca Award, the most
valuable player award for civic/educational achievement and the fellowship award'for educational
achievement.

Section 28(b) further requires that the recipient must be selected without any action on his part to enter
the contest or proceeding and the taxpayer-recipient is not required to render substantial future services
as a condition to receiving the prize or award. If these two requirements are met, then the items should not
be included in the gross income. (BAR 1993)
(vi) Pensions, retirement benefit, or separation pay
1. Company A decides to close its operations due to continuing losses and to terminate the services of its
employees. Under the Labor Code, employees who are separated from service for such cause are
entitled to a minimum of one-half month pay for every year of service. Company A paid the equivalent
of one month pay for every year of service and the cash equivalent of unused vacation and sick leaves
as separation benefits.
Are such benefits taxable and subject to withholding tax under the Tax Code? Decide with reasons.
(5%)
SUGGESTED ANSWER:
The separation benefits paid by Company A to its employees are excluded from gross income being in the
nature of benefits given to employees whose services were terminated due to causes beyond their control. (Sec.
32(B)(6)(b), NIRC). The entire benefits, thus, are not taxable and not subject to withholding tax under the Tax
Code. (BAR 2005)
2. To start a business of his own, Mr. Mario de Guzman opted for an early retirement from a private
company after ten (10) years of service. Pursuant to the company's qualified arid approved private
retirement benefit plan, he was paid his retirement benefit which was subjected to withholding tax.
Is the employer correct in withholding the tax? Explain. (2%)
SUGGESTED ANSWER:
It depends. An employee retiring under a company's qualified and private retirement plan can only be exempt
from income tax on his retirement benefits if the following requisites are met: (1) that the retiring employee
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must have been In service of the same employer for at least ten (10) years; (2) that he is not less than 50 years
of age at the time of retirement; and (3) the benefit is availed of only once.
In the instant case, there is no mention whether the employee has likewise complied with requisites number
(2) and (3).
Under what conditions are retirement benefits received by officials and employees of private firms
excluded from gross income and exempt from taxation? (3%)
SUGGESTED ANSWER:
The conditions to be met in order that retirement benefits received by officials and employees of private firms
are excluded from gross income and exempt from taxation are as follows:
1.

Under Republic Act No. 4917 (those received under a reasonable private benefit plan):
I.
II.
III.

2.

the retiring official or employee must have been in service of the same employer for at least ten (10)
years;
that he is not less than fifty (50) years of age at the time of retirement; and
that the benefit is availed of only once.

Under Republic Act No. 7641 (those received from employers without any retirement plan):
I.
II.

Those received under existing collective bargaining agreement and other agreements are exempt;
and
In the absence of retirement plan or agreement providing for retirement benefits the benefits are
excluded from gross income and exempt from income tax if:
A. retiring employee must have served at least flve (5) years; and
B. that he is not less than sixty (60) years of age but not more than sixty five (65). (BAR 2000)

3. Mr. Javier is a non-resident senior citizen. He receives a monthly pension from the GSIS. which he
deposits with the PNB-Makati Branch. Is he exempt from income tax and therefore not required to file
an income tax return? (5%)
SUGGESTED ANSWER:
Mr. Javier is exempt from income tax on his monthly GSIS pension (Sec. 32(B)(6)(f). NIRC of 1997) but not on
the interest income that might accrue on the pensions deposited with PNB which are subject to final
withholding tax.
Consequently, since Mr. Javier’s sole taxable income would have been subjected to a final withholding tax, he is
not required anymore to file an income tax return. [Sec. 51 (A) (2) (c). Ibid]. (BAR 2000)
4. A Co., a Philippine corporation, has two divisions — manufacturing and construction. Due to the
economic situation, it had to close its construction division and lay-off the employees in that division. A
Co. has a retirement plan approved by the BIR, which requires a minimum of 50 years of age and 10
years of service in the same employer at the time of retirement.
There are 2 groups of employees to be laid off:
(a) Employees who are at least 50 years of age and has at 10 years of service at the time of
termination of employment.
(b) Employees who do no meet either the age or length of service A Co. plans to give the following:
For category (A) employees - the benefits under the BIR approved plan plus an ex gratia payment of one
month of every year of service.
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For category (B) employees - one month for every year of service. For both categories, the cash
equivalent of unused vacation and sick leave credits.
A Co. seeks your advice as to whether or not it will subject any of these payments to WT. Explain your
advice. (5%)
SUGGESTED ANSWER:
For category A employees, all the benefits received on account of their separation are not subject to income tax,
hence no withholding tax shall be imposed. The benefits received under the BIR-approved plan upon meeting
the service requirement and age requirement are explicitly excluded from gross income. The ex gratia payment
also qualifies as an exclusion from gross income being in the nature of benefit received on account of
separation due to causes beyond the employees' control. (Section 32(B), NIRC). The cash equivalent of unused
vacation and sick leave credits qualifies as part of separation benefits excluded from gross income (CIR v. Court
of Appeals, GR No. 96016, October 17, 1991).
For category B employees, all the benefits received by them will also be exempt from income tax, hence not
subject to withholding tax. These are benefits received on account of separation due to causes beyond the
employees' control, which are specifically excluded from gross income. (Section 32(B), NIRC).
ALTERNATIVE ANSWER:
All of the payments are not subject to income tax and should not also be subject to WT. The employees were
laid off, hence separated for a cause beyond their control. Consequently, the amounts to be paid by reason of
such involuntary separation are excluded from gross income, irrespective of whether the employee at the time
of separation has rendered less than ten years of service and/or is below fifty years of age. (Section 32(B),
NIRC). (BAR 1999)
5. X, an employee of ABC Corporation died. ABC Corporation gave X’s widow an amount equivalent to Xs
salary for one year.
Is the amount considered taxable income to the widow? Why?
ANSWER:
No. The amount received by the widow from the decedent’s employer may either be a gift or a separation
benefit on account of death. Both are exclusions from gross income pursuant to provisions of Section 28(b) of
the Tax Code.
ALTERNATIVE ANSWER:
No. Since the amount was given to the widow and not to the estate, it becomes obvious that the amount is more
of a gift. In one U.S. tax case (Estate of Hellstrom vs. Commissioner, 24 T.C. 916), it was held that payments to
the widow of the president of a corporation of the amount the president would have received in salary if he
lived out the year constituted a gift and not an income.
The controlling facts which would lead to the conclusion that the amount received by the widow is not an
income are as follows:
a.
b.
c.
d.
e.

the gift was made to the widow rather than the estate:
there was no obligation for the corporation to make further payments to the deceased;
the widow had never worked for the corporation;
the corporation received no economic benefit; and
the deceased had been fully compensated for his services (Estate of Sydney Carter us. Commissioner,
453 F. 2d 61 (2d Cir. 1971). (BAR 1996)
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6. A, an employee of the Court of Appeals, retired upon reaching the compulsory age of 65 years. Upon
compulsory retirement, A received the money value of his accumulated leave credits in the amount of
P500,000.00.
Is said amount subject to tax? Explain.
ANSWER:
No. The commutation of leave credits, more commonly known as terminal leave pay, Le., the cash equivalent of
accumulated vacation and sick leave credits given to an officer or employee who retires, or separated from the
service through no fault of his own, is exempt from income tax. (BIR Ruling 238-91 dated November 8, 1991;
Commissioner vs. CAandEfrenCastaneda, GRNo. 96016, October 17, 1991). (BAR 1996)
7. Mr. Jacobo worked for a manufacturing firm. Due to business reverses the firm offered voluntary
redundancy ( program in order to reduce overhead expenses. Under the • program an employee who
offered to resign would be given separation pay equivalent to his three month’s basic salary for every
year of service. Mr. Jacobo accepted the offer and received P400.000.00 as separation pay under the
program.
After all the employees who accepted the offer were paid, the firm found its overhead still excessive.
Hence it adopted another redundancy program. Various unprofitable departments were closed. As a
result, Mr. Kintanar was separated from the service. He also received P400.000.00 as separation pay.
Did Mr. Jacobo derive income when he received his separation pay? Explain.
ANSWER:
Yes, Mr. Jacobo derived a taxable income when he received his separation pay because his separation from
employment was voluntary on his part in view of his offer to resign. What is excluded from gross income is any
amount received by an official or employee as a consequence of separation of such official or employee from
the service of the employer for any cause beyond the control of the said official or employee (Sec 28, NIRC).
ALTERNATIVE ANSWER:
No, Mr. Jacobo did not derive any taxable income because the separation pay was due to a retrenchment policy
adopted by the company so that any employee terminated by virtue thereof is considered to have been
separated due to causes beyond the employee’s control. The voluntary redundancy program requiring
employees to make an offer to resign is only considered as a tool to expedite the lay-off of excess manpower
whose services are no longer needed by the employer, but is not the main reason or cause for the termination.
Did Mr. Kintanar derive income when he received his separation pay? Explain.
ANSWER:
No. Mr. Kintanar did not derive any income when he received his separation pay because his separation from
employment is due to causes beyond his control. The separation was involuntary as it was a consequence of the
closure of various unprofitable departments pursuant to the redundancy program. (BAR 1995)
8. Mr. Quiroz worked as chief accountant of a hospital for forty-five years. When he retired at 65 he
received retirement pay equivalent to two months’ salary for every year of service as provided in the
hospital BIR approved retirement plan.
The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was
provided for in the hospital's retirement plan in view of his loyalty and invaluable services for fortyfive years; hence, it resolved to pay him a gratuity of P1 Million over and above his retirement pay.
The Commissioner of Internal Revenue taxed the P1 Million as part of the gross compensation income
of Quiroz who protested that it was excluded from income because (a) it was a retirement pay
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Is Mr. Quiroz correct in claiming that the additional PI Million was retirement pay and therefore
excluded from income? Explain.
Is Mr. Quiroz correct in claiming that the additional PI Million was gift and therefore excluded from
income? Explain.
ANSWER:
No. The additional P1 million is not a retirement pay but a part of the gross compensation income of Mr.
Quiroz. This is not a retirement benefit received in accordance with a reasonable private benefit plan
maintained by the employer as it was not paid out of the retirement plan. Accordingly, the amount received in
excess of the retirement benefits that he is entitled to receive under the BIR-approved retirement plan would
not qualify as an exclusion from gross income.
No. The amount received was in consideration of his loyalty and invaluable services to the company which is
clearly a compensation income received on account of employment. Under the employer’s ‘motivation test,’
emphasis should be placed on the value of Mr. Quiroz services to the company as the compelling reason for
giving him the gratuity, hence it should constitute a taxable income. The payment would only qualify as a gift if
there is nothing but ‘good will, esteem and kindness' which motivated the employer to give the gratuity.
(Stanton vs. U.S., 186 F. Supp. 393). Such is not the case in the herein problem.
ALTERNATIVE ANSWER:
Yes. The 1 million is not compensation income subject to income tax but a gift from his employer. There was no
evidence presented to show that he was not fully compensated for his 45 years of service. If his services
contributed in a large measure to the success of the hospital, it did not give rise to a recoverable debt. The PI
million is purely a gratuity from the company. It is a taxable gift to the transferor. Under the Tax Code, gifts are
excluded from gross income therefore exempt from income tax. (Sec. 28(b)(3). NIRC; Pirovano vs.
Commissioner) (BAR 1995)
9. Pedro Reyes, an official of Corporation X, asked for an “earlier retirement” because he was emigrating
to Australia. He was paid P2,000.000.00 as separation pay in recognition of his valuable service to the
corporation.
Juan Cruz, another official of the same company, was separated for occupying a redundant position. He
was given PI.000,000.00 as separation pay.
Jose Bautista was separated due to his failing eyesight. He was given P500,000.00 as separation pay.
All the three (3) were not qualified to retire under the BIR-approved pension plan of the corporation.
(a) Is the separation pay given to Reyes subject to income tax?
(b) How about the separation pay received by Cruz?
(c) How about the separation pay received by Bautista?
ANSWER:
(a) The separation pay given to Reyes is subject to income tax as compensation income because it arises from
a service rendered pursuant to an employer-employee relationship. It is not considered an exclusion from
gross income because the rule in taxation is tax construed in strictissimijuris or the rule on strict
interpretation of tax exemptions.
(b) The separation pay received by Cruz is not subject to income tax because his separation from the company
was involuntary (Sec. 28 b (7), Tax Code).
(c) The separation pay received by Bautista is likewise not subject to tax. His separation is due to disability,
hence involuntary.
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Under the law, separation pay received through involuntary causes are exempt from taxation. (BAR 1994)
10. Maribel Santos, a retired public school teacher, relies on her pension from the GSIS and the interest
income from a time deposit of P500.000.00 with ABC Bank.
Is Miss Santos liable to pay any tax on her income?
ANSWER:
Maribel Santos is exempt from tax on the pension from the GSIS (Sec. 28(b((7)(F), Tax Code). However, as
regards her time deposit, the interest she receives thereon is subject to 20% final withholding tax. (Sec.
21(a)(c). Tax Code). (BAR 1994)
11. Born of a poor family on 14 February 1944. Mario worked his way through college. After working for
more than 2 years in X Manufacturing Corporation, Mario decided to retire and avail of the benefits
under the very reasonable retirement plan maintained by his employer. He planned to invest whatever
retirement benefits he would receive in a business that will provide his employer with the needed raw
materials. On the day of his retirement on 30 April 1985. he received P400.000.00 as retirement
benefit. In addition, his endowment insurance policy, for which he was paying an annual premium of
PI.520.00 since 1965. also matured. He was then paid the face value of his insurance policy in the
amount of P50.000.00.
Is Mario’s P400.000.00 retirement benefit subject to income tax?
ANSWER:
Mario’s P400.000.00 retirement benefit is subject to income tax. To be exempt, the retirement pay must have
been extended to an employee who is at least 50 years of age and who would have worked for at least ten (10)
years with the employer. The amount cannot be considered as a separation pay that would have exempted
benefits from income tax since it was Mario who had decided to retire instead of being required to do so (Sec.
28. NIRC) (BAR 1991)
12. Delstar Emmanuel Perez, a government employee, retires from the service upon reaching the
compulsory retirement age of 65. Would the amount he is entitled to receive by way of commutation of
his accumulated leave credits, of his terminal leave pay, be subject to income tax?
ANSWER:
The amount that Emmanuel Perez is to receive should not be subjected to income tax, and such was the ruling
by the Supreme Court in the In Re Zialcita Administrative Case (Adm. Matter No. 90-6015-SC, 18 Oct. 1990).
The ruling apparently repudiated, or at least is inconsistent with, its earlier decision in Commissioner vs.
Victoriano (G.R. No. 83176, 10 August 1989). (BAR 1991)
(vii) Income from any source whatever
a) Forgiveness of indebtedness
b) Recovery of accounts previously written-off – when taxable/when not taxable
1. Explain briefly whether the following items are taxable or non- taxable:
Recovery of bad debts previously charged off;
SUGGESTED ANSWER:
Recovery of bad debts previously charged off is taxable to the extent of income tax benefit of said deduction.
(Sec. 34(E)(1), NIRC). (BAR 2005)
c) Receipt of tax refunds or credit
1. Explain briefly whether the following items are taxable or non- taxable:
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Taxes paid and subsequently refunded;
SUGGESTED ANSWER:
It depends. Taxes paid which are allowed as a deduction from gross income are taxable when subsequently
refunded but only to the extent of the income tax benefit of said deduction. (Sec. 34(C)(1), NIRC). It follows that
taxes paid which are not allowed as deduction from gross income, i.e., income tax, donor's tax and estate tax,
are not taxable when refunded. (BAR 2005)
d) Income from any source whatever
1. Explain briefly whether the following items are taxable or non- taxable:
a) Income from jueteng;
SUGGESTED ANSWER:
It is taxable. The law imposes a tax on income from any source whatever* which means that it includes income
whether legal or illegal. (Sec. 32(A), NIRC). (BAR 2005)
2. What is meant by the “tax benefit rule”?
SUGGESTED ANSWER:
Tax benefit rule states that the taxpayer is obliged to declare as taxable income subsequent recovery of bad
debts in the year they were collected to the extent of the tax benefit enjoyed by the taxpayer when the bad
debts were written-off and claimed as a deduction from income. It also applies to taxes previously deducted
from gross income but which were subsequently refunded or credited. The taxpayer is also required to report
as taxable income the subsequent tax refund or tax credit granted to the extent of the tax benefit the taxpayer
enjoyed when such taxes were previously claimed as deduction from income. (BAR 2003)
3. Give an illustration of the application of the tax benefit rule.
SUGGESTED ANSWER:
X Company has a business connected receivable amounting to P100,000.00 from Y who was declared bankrupt
by a competent court. Despite earnest efforts to collect the same, Y was not able to pay, prompting X Company
to write-off the entire liability. During the year of write-off, the entire amount was claimed as a deduction for
income tax purposes reducing the taxable net income of X Company to only PI, 000,000.00. Three years later, Y
voluntarily paid his obligation previously written-off to X Company. In the year of recovery, the entire amount
constitutes part of gross income of X Company because it was able to get full tax benefit three years earlier.
(BAR 2003)
4. Mr. Lajojo is a big-time swindler. In one year he was able to earn PI Million from his swindling
activities. When the Commissioner of Internal Revenue discovered his income from swindling, the
Commissioner assessed him a deficiency income tax for such income.
The lawyer of Mr. Lajojo protested the assessment on the following grounds:
The income tax applies only to legal income, not to illegal income:
Mr. Lajojo’s receipts from his swindling did not constitute income because he was under obligation to
return the amount he had swindled, hence, his receipt from swindling was similar to a loan, which is
not income, because for every peso borrowed he has a corresponding liability to pay one peso; and
How will you rule on each of the three grounds for the protest? Explain.
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ANSWER:
The contention that the income tax applies to legal income and not to illegal income is not correct. Section
28(a) of the Tax Code includes within the purview of gross income all income from whatever source derived.
Hence, the illegality of the income will not preclude the imposition of the income tax thereon.
The contention that the receipts from his swindling did not constitute income because of his obligation to
return the amount swindled is likewise not correct. When a taxpayer acquires earnings, lawfully or unlawfully,
without the consensual recognition, express or implied, of an obligation to repay and without restriction as to
their disposition, he has received taxable income, even though it may still be claimed that he is not entitled to
retain the money, and even though he may still be adjudged to restore its equivalent (James us. U.S.,366 U.S.
213, 1961). To treat the embezzled funds not as taxable Income would perpetuate injustice by relieving
embezzlers of the duty of paying income taxes on the money they enrich themselves with through
embezzlement, while honest people pay their taxes on every conceivable type of income. (Janies us. U.S.) (BAR
1995)
e) Source rules in determining income from within and without
(1) Interests
(2) Dividends
(3) Services
1. 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. (4%)
SUGGESTED ANSWER:
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 the 35% tax based on its
taxable income pursuant to Section 25(a)( 1) of the Tax Code of 1977. 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 from 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]).
Note: The taxable year involved in the problem is 1997, hence, the suggested answer above follows the
applicable provision of the old Tax Code (National Internal Revenue Code of1977) then in effect and the
prevailing jurisprudence on the matter. However, with the adoption of the National Internal Revenue Code
ofl997(RA 8424) which took effect on January 1, 1998, it is expected that the bar candidates have lost track of
the change in the tax law which transpired more than a decade ago. For this reason, it is respectfully requested
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that an answer based on the provisions of the New Tax Code shall be given full credit. Accordingly, an answer
framed in this wise should also be considered as a correct answer, viz:
ANOTHER SUGGESTED ANSWER:
Yes. KIA is a non-resident foreign corporation which is taxable only on income from within. The income of KIA
as an international air carrier is derived from the sale of transportation services. Compensation for services is
an income from within if the services are performed in the Philippines (Section 42(A)(3), NIRC). The
origination of the flight is determinative of the source of the income of the international air carrier. If the flight
originates in the Philippines to a foreign destination, the income is an income from within; if it originates in a
foreign country to any destination, the income is from without. In the case at bar, no flight will originate from
the Philippines because KIA is not licensed to do business here. Hence, the income is not taxable in the
Philippines (Section 28(A)(3)(a), NIRC). (BAR 2009)
(4) Rentals
(5) Royalties
(6) Sale of real property
(7) Sale of personal property
(8) Shares of stock of domestic corporation
f. Exclusions from gross income
1. Distinguish “Exclusion from Gross Income" from “Deductions From Gross Income”. Give an example of
each. (2%)
SUGGESTED ANSWER:
Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of gross
income, for purposes of computing the taxpayer is taxable income, due to the following reasons: (1) It is
exempted by the fundamental law; (2) It is exempted by statute; and (3) It does not come within the definition
of income. (Section 61, RR No. 2).
Deductions from gross income, on the other hand, are the amounts, which the law allows to be deducted from
gross income in order to arrive at net income.
Exclusions pertain to the computation of gross income, while deductions pertain to the computation of net
income.
Exclusions are something received or earned by the taxpayer which do not form part of gross income while
deductions are something spent or paid in earning gross income.
Example of an exclusion from gross income is proceeds of life insurance received by the beneficiary upon the
death of the insured which is not an income or 13th month pay of an employee not exceeding P30.000 which is
an income not recognized for tax purposes. Example of a deduction is business rental. (BAR 2001)
(1) Rationale for the exclusions
(2) Taxpayers who may avail of the exclusions
(3) Exclusions distinguished from deductions and tax credit
1. Congress enacts a law granting grade school and high school students a 10% discount on all schoolprescribed textbooks purchased from any bookstore. The law allows bookstores to claim in full the
discount as a tax credit.
2. Can the BIR require the bookstores to deduct the amount of the discount from their gross
income? Explain. 2.5%
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SUGGESTED ANSWER:
2. No. Tax credit which reduces the tax liability is different from a tax deduction which merely reduces the
income to arrive at the tax base. Since the law allowed bookstores to claim in full the discount as a tax
credit, the BIR is not allowed to expand or contract the legislative mandate (CIR v. Central Luzon Drug
Corp., Id.). (BAR 2006)
(4) Under the Constitution
(i) Income derived by the government or its political subdivisions from the exercise
of any essential governmental function
(ii) Under the Tax Code
a) Proceeds of life insurance policies
1. Noel Santos is a very bright computer science graduate. He was hired by Hewlett Packard. To
entice him to accept the offer of employment, he was offered the arrangement that part of his
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.
SUGGESTED ANSWER:
No. The proceeds of life insurance policies paid to the heirs or 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. (BAR 2007)
2. State with reasons the tax treatment of the following in the preparation of annual- income tax
returns:
Proceeds of life insurance received by a child as irrevocable beneficiary;
SUGGESTED ANSWER:
The proceeds of life insurance received by a child as irrevocable beneficiary are not to be reported in the
annual income tax returns, because they are excluded from gross income. This kind of receipt does not fall
within the definition of income - Many wealth which flows into the taxpayer other than a mere return of
capital”. Since insurance is compensatory in nature, the receipt is merely considered as a return of capital.
(Section 32(B)(1), NIRC; Fisher v. Trinidad, 43 Phil. 73 (19221). (BAR 2005)
3. On 30 June 2000, X took out a life insurance policy on his own life in the amount of P2,000,000.00.
He designated his wife, Y, as irrevocable beneficiary to P1,000,000.00 and his son, Z, to the balance
of P1,000,000.00 but, in the latter designation, reserving his right to substitute him for another. On
01 September 2003, X died and his wife and son went to the insurer to collect the proceeds of X’s
life insurance policy.
Are the proceeds of the insurance subject to income tax on the part of Y and Z for their respective
shares? Explain.
SUGGESTED ANSWER:
No. The law explicitly provides that proceeds of life insurance policies paid to the heirs or beneficiaries
upon the death of the insured are excluded from gross income and is exempt from taxation. The proceeds
of life insurance received upon the death of the insured constitute a compensation for the loss of life,
hence a return of capital, which is beyond the scope of income taxation. (Section 32(B)(1) 1997 Tax Code)
(BAR 2003)
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4. Born of a poor family on 14 February 1944. Mario worked his way through college. After working
for more than 2 years in X Manufacturing Corporation, Mario decided to retire and avail of the
benefits under the very reasonable retirement plan maintained by his employer. He planned to
invest whatever retirement benefits he would receive in a business that will provide his employer
with the needed raw materials. On the day of his retirement on 30 April 1985. he received
P400.000.00 as retirement benefit. In addition, his endowment insurance policy, for which he was
paying an annual premium of PI.520.00 since 1965. also matured. He was then paid the face value
of his insurance policy in the amount of P50.000.00.
Is his P50.000.00 insurance proceeds exempt from income taxation?
ANSWER:
The P50.000.00 insurance proceeds is not totally exempt from income tax. The excluded amount is
only that portion which corresponds to the premiums that he had paid since 1965. At the rate of
PI,520.00 per year multiplied by twenty (20) years which was the period of the policy, he must
have paid a total of P30.400.00. Accordingly, he will be subject to report as taxable income the
amount of P 19,600.00 (Sec. 28. NIRC) (BAR 1991)
b) Return of premium paid
c) Amounts received under life insurance, endowment or annuity contracts
d) Value of property acquired by gift, bequest, devise or descent
1. Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a residential
house and lot in Quezon City. After the recent wedding of their son, Mario, to Maria, the spouses
donated said real property to them. At the time of donation, the real property has a fair market
value of P2 million.
Are Mario and Maria subject to income tax for the value of the property donated to them? Explain.
(4%)
SUGGESTED ANSWER:
No. The value of a property acquired by gift is an exclusion from gross income. (Section 32(B)(3), NIRC).
(BAR 2008)
2. Mr. Osorio, a bank executive, while playing golf with Mr. Perez, a manufacturing firm executive,
mentioned to the latter that his (Osorio) bank had just opened a business relationship with a big
foreign importer of goods which Perez' company manufactures. Perez requested Osorio to
introduce him to this foreign importer and put in a good word for him (Perez), which Osorio did. As
a result, Perez was able to make a profitable business deal with the foreign importer.
In gratitude Perez, in behalf of his manufacturing firm, sent Osorio an expensive car as a gift.
Osorio called Perez and told him that there was really no obligation on the part of Perez or his
company, to give such an expensive gift. But Perez insisted that Osorio keep the car. The company
of Perez deducted the cost of the car as a business expense.
The Commissioner of Internal Revenue included the fair market value of the car as income of
Osorio who protested that the car was a gift and therefore excluded from income.
Who is correct, the Commissioner or Osorio? Explain.
ANSWER:
The Commissioner is correct. The car having been given to Mr. Osorio in consideration of having
introduced Mr. Perez to a foreign Importer which resulted to a profitable business deal is considered to be
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a compensation for services rendered. The transfer is not a gift because it is not made out of a detached or
disinterested generosity but for a benefit accruing to Mr. Perez. The fact that the company of Mr. Perez
takes a business deduction for the payment indicates that it was considered as a pay rather than a gift.
Hence, the fair market value of the car is includable in the gross Income pursuant to Section 28(a)(1) of
the Tax Code (See 1974 Federal Tax Handbook, p. 145). A payment though voluntary, if it is in return for
services rendered, or proceeds from the constraining force of any moral or legal duty or a benefit to the
payor is anticipated, is a taxable income to the payee even if characterized as a ‘gift’ by the payor
(Commissioner vs. Duberstein, 363 U.S. 278).
ALTERNATIVE ANSWER:
Mr. Osorio is correct. The car was not payment for services rendered. There was no prior agreement or
negotiations between Mr. Osorio and Mr. Perez that the former will be compensated for his services. Mr.
Perez, in behalf of his company, gave the car to Mr. Osorio out of gratitude. The transfer having been made
gratuitously should be treated as a gift subject to donor’s tax and should be excluded from the gross
income of the recipient, Mr. Osorio. The Commissioner should cancel the assessment of deficiency income
tax to Mr. Osorio and instead assess deficiency donor’s tax on Mr Perez’ company. (Sec. 28(b)(3), NIRC;
Pirovano vs. Commissioner. (BAR 1995)
3. Mr. Quiroz worked as chief accountant of a hospital for forty-five years. When he retired at 65 he
received retirement pay equivalent to two months’ salary for every year of service as provided in
the hospital BIR approved retirement plan.
The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was
provided for in the hospital's retirement plan in view of his loyalty and invaluable services for
forty-five years; hence, it resolved to pay him a gratuity of P1 Million over and above his
retirement pay.
The Commissioner of Internal Revenue taxed the P1 Million as part of the gross compensation
income of Quiroz who protested that it was excluded from income because (b) it was a gift.
Is Mr. Quiroz correct in claiming that the additional PI Million was gift and therefore excluded from
income? Explain.
ANSWER:
No. The amount received was in consideration of his loyalty and invaluable services to the company which
is clearly a compensation income received on account of employment. Under the employer’s ‘motivation
test,’ emphasis should be placed on the value of Mr. Quiroz services to the company as the compelling
reason for giving him the gratuity, hence it should constitute a taxable income. The payment would only
qualify as a gift if there is nothing but ‘good will, esteem and kindness' which motivated the employer to
give the gratuity. (Stanton vs. U.S., 186 F. Supp. 393). Such is not the case in the herein problem.
ALTERNATIVE ANSWER:
Yes. The 1 million is not compensation income subject to income tax but a gift from his employer. There
was no evidence presented to show that he was not fully compensated for his 45 years of service. If his
services contributed in a large measure to the success of the hospital, it did not give rise to a recoverable
debt. The PI million is purely a gratuity from the company. It is a taxable gift to the transferor. Under the
Tax Code, gifts are excluded from gross income therefore exempt from income tax. (Sec. 28(b)(3). NIRC;
Pirovano vs. Commissioner) (BAR 1995)
4. Mr. Rodrigo, an 80-year old retired businessman, fell in love with 20-year old Tetchie Sonora, a
night club hospitality girl. Although she refused to marry him she agreed to be his “live-in" partner.

Page | 78

In gratitude Mr. Rodrigo transferred to her a condominium unit, where they both live, under a
deed of sale for P10 Million. Mr. Rodrigo paid the capital gains tax of 5% of P10 Million.
The Commissioner of Internal Revenue found that the property was transferred to Tetchie Sonora
by Mr. Rodrigo because of the companionship she was providing him. Accordingly. the
Commissioner made a determination that Sonora had compensation income of P10 Million in the
year the condominium unit was transferred to her and issued a deficiency income tax assessment.
Tetchie Sonora protests the assessment and claims that the transfer of the condominium unit was
a gift and therefore excluded from income.
How will you rule on the protest of Tetchie Sonora? Explain.
ANSWER:
I will grant the protest and cancel the assessment. The transfer of the property by Mr. Rodrigo to Ms.
Sonora was gratuitous. The deed of sale indicating a P10 million consideration was simulated because Mr.
Rodrigo did not-receive anything from the sale. The problem categorically states that the transfer was
made in gratitude to Ms. Sonora’s companionship. The transfer being gratuitous is subject to donor’s tax.
Mr. Rodrigo should be assessed deficiency donor’s tax and a 50% surcharge imposed for fraudulently
simulating a contract of sale to evade donor’s tax, (Sec. 91(b), NIRC). (BAR 1995)
5. ABC Computer Corp. purchased some years ago Membership,Certificate No. 7 from the Calabar Golf
Club, Inc. for P300.000.00. In 4 September 1985, it transferred the same to Mr. John Johnson, its
American computer consultant, to enable him to avail of the facilities of the Club during his stay
here. The consultancy agreement expired two (2) years later. In the meantime, the value of the
Club share appreciated and what was purchased by the corporation at P300,000.00, commanded a
market value of P800.000.00 in 1987. Before he returned home a few days after his tenure ended,
Mr. Johnson transferred the subject share to Mr. Robert James, the new consultant of the firm and
the newly designated playing representative, under a Deed of Declaration of Trust and Assignment
of Shares wherein the former acknowledged the absolute ownership of ABC Computer Corp. over
the share, that the assignment was without any consideration, and that the share was placed in his
name because the Club required it to be done.
Is the said assignment a gift and, therefore, subject to gift tax?
ANSWER:
The assignment can neither be held to be a gift. To be considered a gift within the context of the NIRC,
there must be a transfer of ownership or a quantifiable interest. More importantly, the transfer of the
membership certificate was merely a designation of the consultant to be the “playing representative" of
ABC Computer Corporation in the Calabar Golf Club. (BAR 1991)
e) Amount received through accident or health insurance
1. Antonia Santos, 30 years old, gainfully employed, is the sister of Eduardo 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 agree to a total settlement of P10 Million. This is what Antonia
would have earned as somebody who was gainfully employed. Edgardo was her only heir.
Should Edgardo report the P10 Million as his income being Antonia’s only heir? Reason briefly.
SUGGESTED ANSWER:
Page | 79

The PIOM 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 covering the passengers of the airline company and is in the nature of compensation for
personal injuries and for damages sustained on 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]). (BAR 2007)
2. JR was a passenger of an airline that crashed. He survived the accident but sustained serious
physical injuries which required hospitalization for 3 months. Following negotiations with the
airline and its insurer, an agreement was reached under the terms of which JR was paid the
following amounts: P500, 000.00 for his hospitalization: P250, 000.00 as moral damages: P300,
000.00 for loss of income during the period of his treatment and recuperation. In addition, JR
received from his employer the amount of P200,000.00 representing the cash equivalent of his
earned vacation and sick leaves.
Which, if any, of the amounts he received are subject to income tax? Explain. (5%)
SUGGESTED ANSWER:
The amount of P200,000.00 that JR received from his employer is subject to income tax except the money
equivalent of ten (10) days unutilized vacation leave credits which is not taxable. Amounts of vacation
allowances or sick leave credits which are paid to an employee constitutes compensation (Sec. 2.78(A)(7),
RR No. 2-98, as amended by RR No. 10-2000).
The amounts that JR received from the airline are excluded from gross income and not subject to income
tax because they are compensation for personal injuries suffered from an accident as well as damages
received as a result of an agreement (negotiation) on account of such injuries. (Sec. 32(B)(4), NIRC). (BAR
2005)
3. X, while driving home from his office, was seriously injured when his automobile was bumped
from behind by a bus driven by a reckless driver. 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), P100, 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 foregoing awards are taxable income to X and which are not? Explain.
SUGGESTED ANSWER:
Nothing is taxable. Under the Tax Code, any amount received as compensation for personal injuries or
sickness, plus the amounts for any damages received whether by suit or agreement, on account of such
injuries or sickness shall be excluded from gross income. Since the entire amount of P450, 000.00 received
are award of damages on account of the injuries sustained, all shall be excluded from his gross income.
Obviously, these damages are considered by law as mere return of capital. (Section 32(B)(4), 1997 Tax
Code) (BAR 2003)
4. Mr. Infante was hit by a wayward bus while on his way to work. He survived but had to pay
P400.000.00 for his hospitalization. He was unable to work for six months which meant that he did
not receive his usual salary of P10,000.00 a month or a total of P60.000.00. He sued the bus
company and was able to obtain a final judgment awarding him P400.000.00 as reimbursement for
his hospitalization, P60.000 for the salaries he failed to receive while hospitalized, P200.000.00 as
Page | 80

moral damages for his pain and suffering, and P100,000.00 as exemplary damages. He was able to
collect in full from the judgment.
How much income did he realize when he collected on the judgment? Explain.
None. The P200.000 moral and exemplary damages are compensation for injuries sustained by Mr.
Infante. The P400.000.00 reimbursement for hospitalization expenses and the P60.000.00 for salaries he
failed to receive are ‘amounts of any damages received whether by suit or agreement on account of such
injuries.’ Section 28(b)(5) of the Tax Code specifically exclude these amounts from the gross income of the
individual injured. (Section 28(b). NIRC and Sec. 63 Rev. Reg. No. 2)
ALTERNATIVE ANSWER:
The income realized from the judgment is only the recovery for lost salaries. This constitutes taxable
income because were it not for the injury, he could have received it from his employer as compensation
income. All the other amounts received are either compensation for injuries or damages received on
account of such injuries’ which are exclusions from gross income pursuant to Section 28(b)(5) of the Tax
Code.
f) Income exempt under tax treaty
g) Retirement benefits, pensions, gratuities, etc.
1. Company A decides to close its operations due to continuing losses and to terminate the services of
its employees. Under the Labor Code, employees who are separated from service for such cause are
entitled to a minimum of one-half month pay for every year of service. Company A paid the
equivalent of one month pay for every year of service and the cash equivalent of unused vacation
and sick leaves as separation benefits.
Are such benefits taxable and subject to withholding tax under the Tax Code? Decide with reasons.
(5%)
SUGGESTED ANSWER:
The separation benefits paid by Company A to its employees are excluded from gross income being in the
nature of benefits given to employees whose services were terminated due to causes beyond their control.
(Sec. 32(B)(6)(b), NIRC). The entire benefits, thus, are not taxable and not subject to withholding tax
under the Tax Code. (BAR 2005)
2. To start a business of his own, Mr. Mario de Guzman opted for an early retirement from a private
company after ten (10) years of service. Pursuant to the company's qualified arid approved private
retirement benefit plan, he was paid his retirement benefit which was subjected to withholding
tax.
Is the employer correct in withholding the tax? Explain. (2%)
SUGGESTED ANSWER:
It depends. An employee retiring under a company's qualified and private retirement plan can only be
exempt from income tax on his retirement benefits if the following requisites are met: (1) that the retiring
employee must have been In service of the same employer for at least ten (10) years; (2) that he is not less
than 50 years of age at the time of retirement; and (3) the benefit is availed of only once.
In the instant case, there is no mention whether the employee has likewise complied with requisites
number (2) and (3).
Under what conditions are retirement benefits received by officials and employees of private firms
excluded from gross income and exempt from taxation? (3%)
Page | 81

SUGGESTED ANSWER:
The conditions to be met in order that retirement benefits received by officials and employees of private
firms are excluded from gross income and exempt from taxation are as follows:
a.

Under Republic Act No. 4917 (those received under a reasonable private benefit plan):
I.
II.
III.

b.

the retiring official or employee must have been in service of the same employer for at least ten
(10) years;
that he is not less than fifty (50) years of age at the time of retirement; and
that the benefit is availed of only once.

Under Republic Act No. 7641 (those received from employers without any retirement plan):
I.

Those received under existing collective bargaining agreement and other agreements are
exempt; and

II.

In the absence of retirement plan or agreement providing for retirement benefits the benefits
are excluded from gross income and exempt from income tax if:
A. retiring employee must have served at least flve (5) years; and
B. that he is not less than sixty (60) years of age but not more than sixty five (65). (BAR
2000)

3. Mr. Javier is a non-resident senior citizen. He receives a monthly pension from the GSIS. which he
deposits with the PNB-Makati Branch. Is he exempt from income tax and therefore not required to
file an income tax return? (5%)
SUGGESTED ANSWER:
Mr. Javier is exempt from income tax on his monthly GSIS pension (Sec. 32(B)(6)(f). NIRC of 1997) but not
on the interest income that might accrue on the pensions deposited with PNB which are subject to final
withholding tax.
Consequently, since Mr. Javier’s sole taxable income would have been subjected to a final withholding tax,
he is not required anymore to file an income tax return. [Sec. 51 (A) (2) (c). Ibid]. (BAR 2000)
4. X, an employee of ABC Corporation died. ABC Corporation gave X’s widow an amount equivalent to
Xs salary for one year.
Is the amount considered taxable income to the widow? Why?
ANSWER:
No. The amount received by the widow from the decedent’s employer may either be a gift or a separation
benefit on account of death. Both are exclusions from gross income pursuant to provisions of Section
28(b) of the Tax Code.
ALTERNATIVE ANSWER:
No. Since the amount was given to the widow and not to the estate, it becomes obvious that the amount is
more of a gift. In one U.S. tax case (Estate of Hellstrom vs. Commissioner, 24 T.C. 916), it was held that
payments to the widow of the president of a corporation of the amount the president would have received
in salary if he lived out the year constituted a gift and not an income.
The controlling facts which would lead to the conclusion that the amount received by the widow is not an
income are as follows:
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a.
b.
c.
d.
e.

the gift was made to the widow rather than the estate:
there was no obligation for the corporation to make further payments to the deceased;
the widow had never worked for the corporation;
the corporation received no economic benefit; and
the deceased had been fully compensated for his services (Estate of Sydney Carter us.
Commissioner, 453 F. 2d 61 (2d Cir. 1971). (BAR 1996)

5. A, an employee of the Court of Appeals, retired upon reaching the compulsory age of 65 years.
Upon compulsory retirement, A received the money value of his accumulated leave credits in the
amount of P500,000.00.
Is said amount subject to tax? Explain.
ANSWER:
No. The commutation of leave credits, more commonly known as terminal leave pay, Le., the cash
equivalent of accumulated vacation and sick leave credits given to an officer or employee who retires, or
separated from the service through no fault of his own, is exempt from income tax. (BIR Ruling 238-91
dated November 8, 1991; Commissioner vs. CAandEfrenCastaneda, GRNo. 96016, October 17, 1991). (BAR
1996)
6. Mr. Jacobo worked for a manufacturing firm. Due to business reverses the firm offered voluntary
redundancy ( program in order to reduce overhead expenses. Under the • program an employee
who offered to resign would be given separation pay equivalent to his three month’s basic salary
for every year of service. Mr. Jacobo accepted the offer and received P400.000.00 as separation pay
under the program.
After all the employees who accepted the offer were paid, the firm found its overhead still
excessive. Hence it adopted another redundancy program. Various unprofitable departments were
closed. As a result, Mr. Kintanar was separated from the service. He also received P400.000.00 as
separation pay.
Did Mr. Jacobo derive income when he received his separation pay? Explain.
ANSWER:
Yes, Mr. Jacobo derived a taxable income when he received his separation pay because his separation from
employment was voluntary on his part in view of his offer to resign. What is excluded from gross income is
any amount received by an official or employee as a consequence of separation of such official or
employee from the service of the employer for any cause beyond the control of the said official or
employee (Sec 28, NIRC).
ALTERNATIVE ANSWER:
No, Mr. Jacobo did not derive any taxable income because the separation pay was due to a retrenchment
policy adopted by the company so that any employee terminated by virtue thereof is considered to have
been separated due to causes beyond the employee’s control. The voluntary redundancy program
requiring employees to make an offer to resign is only considered as a tool to expedite the lay-off of excess
manpower whose services are no longer needed by the employer, but is not the main reason or cause for
the termination.
Did Mr. Kintanar derive income when he received his separation pay? Explain.
ANSWER:
No. Mr. Kintanar did not derive any income when he received his separation pay because his separation
from employment is due to causes beyond his control. The separation was involuntary as it was a
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consequence of the closure of various unprofitable departments pursuant to the redundancy program.
(BAR 1995)
7. Mr. Quiroz worked as chief accountant of a hospital for forty-five years. When he retired at 65 he
received retirement pay equivalent to two months’ salary for every year of service as provided in
the hospital BIR approved retirement plan.
The Board of Directors of the hospital felt that the hospital should give Quiroz more than what was
provided for in the hospital's retirement plan in view of his loyalty and invaluable services for
forty-five years; hence, it resolved to pay him a gratuity of P1 Million over and above his
retirement pay.
The Commissioner of Internal Revenue taxed the P1 Million as part of the gross compensation
income of Quiroz who protested that it was excluded from income because (a) it was a retirement
pay
Is Mr. Quiroz correct in claiming that the additional PI Million was retirement pay and therefore
excluded from income? Explain.
Is Mr. Quiroz correct in claiming that the additional PI Million was gift and therefore excluded from
income? Explain.
ANSWER:
No. The additional P1 million is not a retirement pay but a part of the gross compensation income of Mr.
Quiroz. This is not a retirement benefit received in accordance with a reasonable private benefit plan
maintained by the employer as it was not paid out of the retirement plan. Accordingly, the amount
received in excess of the retirement benefits that he is entitled to receive under the BIR-approved
retirement plan would not qualify as an exclusion from gross income.
No. The amount received was in consideration of his loyalty and invaluable services to the company which
is clearly a compensation income received on account of employment. Under the employer’s ‘motivation
test,’ emphasis should be placed on the value of Mr. Quiroz services to the company as the compelling
reason for giving him the gratuity, hence it should constitute a taxable income. The payment would only
qualify as a gift if there is nothing but ‘good will, esteem and kindness' which motivated the employer to
give the gratuity. (Stanton vs. U.S., 186 F. Supp. 393). Such is not the case in the herein problem.
ALTERNATIVE ANSWER:
Yes. The 1 million is not compensation income subject to income tax but a gift from his employer. There
was no evidence presented to show that he was not fully compensated for his 45 years of service. If his
services contributed in a large measure to the success of the hospital, it did not give rise to a recoverable
debt. The PI million is purely a gratuity from the company. It is a taxable gift to the transferor. Under the
Tax Code, gifts are excluded from gross income therefore exempt from income tax. (Sec. 28(b)(3). NIRC;
Pirovano vs. Commissioner) (BAR 1995)
8. Pedro Reyes, an official of Corporation X, asked for an “earlier retirement” because he was
emigrating to Australia. He was paid P2,000.000.00 as separation pay in recognition of his
valuable service to the corporation.
Juan Cruz, another official of the same company, was separated for occupying a redundant
position. He was given PI.000,000.00 as separation pay.
Jose Bautista was separated due to his failing eyesight. He was given P500,000.00 as separation
pay.
Page | 84

All the three (3) were not qualified to retire under the BIR-approved pension plan of the
corporation.
(a) Is the separation pay given to Reyes subject to income tax?
(b) How about the separation pay received by Cruz?
(c) How about the separation pay received by Bautista?
ANSWER:
(a) The separation pay given to Reyes is subject to income tax as compensation income because it arises
from a service rendered pursuant to an employer-employee relationship. It is not considered an
exclusion from gross income because the rule in taxation is tax construed in strictissi mijuris or the
rule on strict interpretation of tax exemptions.
(b) The separation pay received by Cruz is not subject to income tax because his separation from the
company was involuntary (Sec. 28 b (7), Tax Code).
(c) The separation pay received by Bautista is likewise not subject to tax. His separation is due to
disability, hence involuntary.

Under the law, separation pay received through involuntary causes is exempt from taxation. (BAR 1994)
9. Born of a poor family on 14 February 1944. Mario worked his way through college. After working
for more than 2 years in X Manufacturing Corporation, Mario decided to retire and avail of the
benefits under the very reasonable retirement plan maintained by his employer. He planned to
invest whatever retirement benefits he would receive in a business that will provide his employer
with the needed raw materials. On the day of his retirement on 30 April 1985. he received
P400.000.00 as retirement benefit. In addition, his endowment insurance policy, for which he was
paying an annual premium of PI.520.00 since 1965, also matured. He was then paid the face value
of his insurance policy in the amount of P50.000.00.
Is Mario’s P400.000.00 retirement benefit subject to income tax?
ANSWER:
Mario’s P400.000.00 retirement benefit is subject to income tax. To be exempt, the retirement pay must
have been extended to an employee who is at least 50 years of age and who would have worked for at
least ten (10) years with the employer. The amount cannot be considered as a separation pay that would
have exempted benefits from income tax since it was Mario who had decided to retire instead of being
required to do so (Sec. 28. NIRC) (BAR 1991)
10. Delstar Emmanuel Perez, a government employee, retires from the service upon reaching the compulsory
retirement age of 65. Would the amount he is entitled to receive by way of commutation of his accumulated
leave credits, of his terminal leave pay, be subject to income tax?
ANSWER:
The amount that Emmanuel Perez is to receive should not be subjected to income tax, and such was the
ruling by the Supreme Court in the In Re Zialcita Administrative Case (Adm. Matter No. 90-6015-SC, 18
Oct. 1990). The ruling apparently repudiated, or at least is inconsistent with, its earlier decision in
Commissioner vs. Victoriano (G.R. No. 83176, 10 August 1989). (BAR 1991)
h) Winnings, prizes, and awards, including those in sports competition
1. Jose Miranda, a young artist and designer, received a prize of P100.000.00 for winning in the onthe-spot peace poster contest sponsored by a local Lions Club. Shall the reward be included in the
gross income of the recipient for tax purposes? Explain. (3%)
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SUGGESTED ANSWER:
No. It is not includable in the gross income of the recipient because the same is subject to a final tax of
20%, the amount thereof being in excess of P10.000 (Sec. 24(B)(1), NIRC of 1997). The prize constitutes a
taxable income because it was made primarily in recognition of artistic achievement which he won due to
an action on his part to enter the contest. [Sec. 32 (B) (7) (c), NIRC of 1997] Since it is an on-the-spot
contest, it is evident that he must have joined the contest in order to earn the prize or award. (BAR 2000)
2. Is the prize of one million pesos awarded by the Reader's Digest subject to withholding of final tax?
Who is responsible for withholding the tax? What are the liabilities for failure to withhold such
tax? (5%)
SUGGESTED ANSWER:
a) It depends. If the prize is considered as winnings derived from sources within the Philippines, it is
subject to withholding of final tax (Sec. 24[B] in relation to Sec. 57[A], NIRC). & derived from
sources without the Philip-pines, it is not subject to withholding of final tax because the Philippine
tax law and regulations could not reach out to foreign jurisdictions.
b) The tax shall be withheld by the Reader's Digest or local agent who has control over the payment
of the prize.
c) Any person required to withhold or who willfully fails to withhold, shall, in addition to the other
penalties provided under the Code, be liable upon conviction to a penalty equal to the total amount
of tax not withheld (Sec. 251, NIRC). In case of failure to withhold the tax or in the case of under
withholding, the deficiency tax shall be collected from the payor/withholding agent (1st par.. Sec.
2.57(A), R.R. No. 2-98).
Any person required under the Tax Code or by rules and regulations to withhold taxes at the time or times
required by law or rules and regulations shall, in addition to other penalties provided by law, upon
conviction be punished by a fine of not less than Ten thousand pesos (Phpl0,000) and suffer imprisonment
of not less than one (1) year but not more than ten (10) years (1st par., Sec. 255, NIRC).
Comment:
It is suggested that any of the following answers to the question, “What are the liabilities for failure to
withhold such a tax?” be given full credit:
1. The payor shall be liable for the payment of the tax which was not withheld.
2. The payor/withholding agent shall be liable to both civil and criminal penalties imposed by the
Tax Code. (BAR 1998)
3. Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council,
a sports association duly accredited by the Philippine Boxing Association. Onyoc received the
amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to
collect income tax on the amount received by Onyoc and donor’s tax from Ayala Land Corporation,
which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.
ANSWER:
The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the
income tax. RA. No. 7549 explicitly provides that “All prizes and awards granted to athletes in local and
International sports tournaments and competitions held in the Philippines or abroad and sanctioned by
their respective national sports associations shall be exempt from income tax".

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Neither is the BIR correct in collecting the donor’s tax from Ayala Land Corporation. The law is clear when
it categorically stated “That the donor’s of said prizes and awards shall be exempt from the payment of the
donor’s tax." (BAR 1996)
(iii) Under special laws
a) Personal Equity and Retirement Account
g. Deductions from gross income
1. Distinguish “Exclusion from Gross Income" from “Deductions From Gross Income”. Give an
example of each. (2%)
SUGGESTED ANSWER:
Exclusions from gross income refer to a flow of wealth to the taxpayer which are not treated as part of
gross income, for purposes of computing the taxpayeris taxable income, due to the following reasons: (1)
It is exempted by the fundamental law; (2) It is exempted by statute; and (3) It does not come within the
definition of income. (Section 61, RR No. 2).
Deductions from gross income, on the other hand, are the amounts, which the law allows to be deducted
from gross income in order to arrive at net income.
Exclusions pertain to the computation of gross income, while deductions pertain to the computation of net
income.
Exclusions are something received or earned by the taxpayer which do not form part of gross income
while deductions are something spent or paid in earning gross income.
Example of an exclusion from gross income is proceeds of life insurance received by the beneficiary upon
the death of the insured which is not an income or 13th month pay of an employee not exceeding P30.000
which is an income not recognized for tax purposes. Example of a deduction is business rental. (BAR 2001)
(1) General rules
(i) Deductions must be paid or incurred in connection with the taxpayer’s trade,
business or profession
1. Sometime in December 1980, a taxpayer donated to his son 3,000 shares of stock of San Miguel
Corporation. For failure to file a donor’s return on the donation within the statutory period, the
taxpayer was assessed the sum of PI02,000.00, as donor’s tax plus 25% surcharge or P25.500.00
and 20% interest or P20.400.00which he paid on June 24. 1985.
On April 10, 1986, he filed his income tax return for 1985 claiming among others, a deduction for
interest amounting to P9.500.00 and reported a taxable income of P96.000.00.
On November 10. 1986, the taxpayer filed an amended income tax return for the same calendar
year 1985, claiming therein an additional deduction in the amount of P20.400.00 representing
interest paid on the donor’s gift tax.
A claim for refund of alleged overpaid income tax for 1985 was filed with the Commissioner which
was subsequently denied.
Upon appeal with the Court of Tax Appeals, the Commissioner took Issue with the Court of Tax
Appeal’s determination that the amount paid by the taxpayer for interest on his delinquent taxes
is deductible from the gross income for the same year pursuant to Sec. 29 (b) (1) of the National
Internal Revenue Code.
The Commissioner of Internal Revenue pointed out that a tax is not an indebtedness. He argued
that there is a fundamental distinction between a “tax" and a "debt". According to the
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Commissioner, the deductibility of “interest on indebtedness from a person’s income tax cannot
extend to interest on taxes."
What is your opinion on the argument of the Commissioner that a tax is not an indebtedness so
that deductibility on the interest on taxes should not be allowed?
ANSWER:
The Commissioner’s argument is misplaced because the interest on the donor’s tax is not one that can be
considered as having been incurred in connection with the taxpayer’s trade, business or exercise of
profession.
ALTERNATIVE ANSWER:
a) While a tax may be considered a debt for purposes of deducting from gross income, the interest on
taxes cannot be so considered, as such interest is in the nature of a penalty, the imposition of which is
designed to discourage delinquent payment of taxes. To allow the deductibility of such interest would
be to diminish the punitive and deterrent effects of the imposition, and thus to diminish the
importance of the prompt payment of taxes.
b) The argument of the Commissioner is wrong. Because while a tax as a general rule is not a debt,
interest on a non-payment of a tax has been considered like interest on indebtedness by the Supreme
Court. (Note: Whether or not the interest is deductible under the present aw no apparently in
question). (BAR 1992)

(ii) Deductions must be supported by adequate receipts or invoices (except standard
deduction)
(iii) Additional requirement relating to withholding
(2) Return of capital (cost of sales or services)
(i) Sale of inventory of goods by manufacturers and dealers of properties
(ii) Sale of stock in trade by a real estate dealer and dealer in securities
(iii) Sale of services
(3) Itemized deductions
(i) Expenses
a) Requisites for deductibility
1. The Filipinas Hospital for Crippled Children is a charitable organization. X visited the hospital, on his birthday,
as was his custom. He gave P100,000.00 to the hospital and P5.000.00 to a crippled girl whom he particularly
pitied. A crippled son of X is in the hospital as one of its patients. X wants to exclude both the P100,000.00 and
the P5.000.00 from his gross income. Discuss.
ANSWER:
Under Sec. 29 (h) 11) of the National Internal Revenue Code charitable contributions to be deductible
must be:
a. actually paid or made to domestic corporations or associations organized and operated exclusively for
religious. charitable, scientific, youth and sports development, cultural or educational purposes or for
rehabilitation of veterans or to social welfare institutions no part of which inures to the benefit of any
private individual;
b. made within the taxable year;
c. not more than 6% (for individuals) of 3% (for corporations) of the taxpayer’s taxable income to be
computed without including the contribution.

Applying the above-provisions of law to the case at bar, it is clear therefore that only the PI00,000.00
contribution of X to Filipinas Hospital for Crippled Children qualified as a deductible contribution.
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Sec. 29 (h) (1) of the NIRC expressly provides that the same must be actually paid to a charitable
organization to be deductible. Note that the law accorded no privilege to similar contributions extended
to private individuals. Hence, the P5,000.00 contribution to the crippled girl cannot be claimed as a
deduction.
ALTERNATIVE ANSWER:
a) The P100,000.00 donation may properly be deducted from X’s gross income, but not the P5.000.00
donated to the crippled girl, as charitable and other contributions that may be deducted from taxable
income do not contemplate those given to individuals. While it may be that X’s son is a patient in the
hospital, it cannot be said that part of its net income inures to the benefit of X as to be disallowed as a
deduction from taxable income.
b) Assuming X is a self-employed Individual, he may not deduct the donations made because under
Section 29 of the NIRC as amended by RA 7496 better known as SNITS, only contribution to the
government or to an accredited relief organization for the rehabilitation of calamity stricken areas
declared by the President may be deducted for income tax purposes. Clearly, the donees do not qualify
as relief organizations.

Assuming X is receiving purely compensation income, he can only deduct from gross compensation
income personal exemption, additional personal exemption and special additional personal exemption
(Section 29. NIRC as amended).
Note:
The problem does not refer to any particular taxable period, so if the contributions were effected prior to
the effectivity of R.A. 7496, then the contribution of P100,000.00 can be allowed, subject to the limitations
prescribed under Sec. 29 (h) (i) of the NIRC. (BAR 1993)
2. X just hurdled the bar examinations and immediately engaged in the practice of law. In preparing
his income tax return, he listed the following as deductible items: (a) fees paid to the Supreme
Court to be able to take the bar examinations; (b) fees paid to a law school to enroll in its pre- bar
review classes; (c) malpractice insurance and (d) amount spent to entertain a judge who decided
his first case. Which deductions are allowable? Reasons.
ANSWER:
Sec. 29 of the National Internal Revenue Code on deductions, among other things provides:
"(a) Expenses
(1) Business Expenses (a) In general - All the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; travelling expenses while away from home in the
pursuit of a trade, profession or business; rentals or other payments required to be made as a condition to
the continued use or possession, for the purpose of the trade, profession or business of property to which
the taxpayer hasnot taken nor is not taking title or in which he has no equity."
Further, Sec. 69 of Revenue Regulations No. 2.as amended, otherwise known as “Income Tax Regulations"
reads:
“Sec. 69. Professional Expenses – A professional may claim as deductions the cost of supplies used by
him or in the practice of his profession, expenses paid in the operation and repair of transportation
equipment used in making professional calls, dues to professional societies and subscriptions to
professional journals, the rent paid for office rooms, the expenses of the fuel, light, water, telephone, etc.
used on such offices, and the hire of office assistants. Amounts currently expended for books, furnitures
and professional instruments and equipment, the useful life of which is short, may be deducted. But
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amounts expended for books, furniture and professional instruments and equipment of a permanent
character are not allowable deductions."
From the foregoing provisions of law that ordinary and necessary expenses incurred during a taxable year
pertaining directly to the practice of a profession may be allowed as deductions, it may be inferred from a
keen reading of Sec. 69 of Revenue Regulations No. 2 that aside from personal exemptions, only direct
costs or overhead expenses incurred in the actual practice of a profession may be claimed, i.e. supplies,
fuel, light, electricity, salaries, etc.
Applying the above considerations in the case at bar, it appears that among the expenses incurred by X.
only the premiums he paid for malpractice insurance qualifies as a deductible expense, the same being an
ordinary and necessary expense in the pursuit of a profession as defined by Sec. 29 of the NIRC and
further qualified by Revenue Regulations No. 2. The tuition fees for pre-bar classes and the bar
examination fees paid to the Supreme Court by X do not qualify as deductible expenses under Revenue
Regulations No. 2. As for the amount spent by X to entertain the judge who decided his first case, the same
may not be claimed as an expense. A business expense to be deductible must be sustained by adequate
proof and that the same must not be against the law or public policy [Consolidated Mines, Inc. us. Court of
Tax Appeals, L-18863 29 August 1974).
Moreover, it may be worthwhile to note that under Sec. 3 (B) of Revenue Regulations No. 2-93,
implementing Republic Act No. 7496, otherwise known as “An Act Adopting The Simplified Net Income
Taxation Scheme for the Self-Employed and Professionals Engaged In the Practice Of Their Profession,
amending Section 21 and 29 of the National Internal Revenue Code, as amended", only the following direct
costs are deductible:
a. Raw materials
b. Salaries of employees directly performing services for the taxpayer in the course of or pursuant to
his business or practice of his profession. This includes salaries and wages paid for janitorial,
security, bookkeeping, administrative and sales personnel, by a self-employed taxpayer or a
professional in the exercise of his profession:
c. telecommunication, electricity, fuel, light and water;
d. business rental;
e. depreciation;
f. Contribution made to the Government and accredited relief organizations for the rehabilitation of
calamity- stricken areas declared by the President.

The deductibility of the contributions is based on two criteria, to wit:
1. The donee or recipient must be the government or accredited relief organization: and
2. The contribution must be utilized for the rehabilitation of calamity-stricken areas declared
by the President.
The term “Government" as used in the law refers to the Philippines or any of its agencies or
political subdivisions and includes:
i. Departments, agencies, bureaus, commissions and authorities, including state colleges and
universities:
ii. Autonomous regions, provincial, city or municipal governments;
g. Interest paid or accrued within a taxable year on loans contracted from accredited financial
institutions which must be proven to have been paid or incurred in connection with the conduct of
a taxpayer's profession, trade or business.

ALTERNATIVE ANSWER:
None of the expenses are allowable. With respect to individuals engaged in the practice of a profession,
the NIRC limits deductions only to direct costs incurred in the exercise of the profession, which costs do
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not include the items being claimed by X.
Note:
Again, the problem did not refer to any particular taxable period. (BAR 1993)
3. X’s favorite charity organization is the Philippine National Red Cross. To raise money, PNRC
sponsored a concert featuring the Austria Boys Choir. X advanced P100,000.(X) to the PNRC for
which he was issued a promissory note. Before its maturity, X cancelled and returned the note to
PNRC. An advertising man, X also undertook the promotions of the Austria Boys Choir. Part of the
promotions campaign was to ask prominent personalities to publicly donate blood to the PNRC a
day before the concert. X himself donated 100 cc of blood. X intends, to claim as deductions the
value of the note, the cash value of the promotions campaign and the cash value of the blood he
donated. Give your legal advice.
ANSWER:
The value of the note can be claimed as deduction as charitable contribution. While the amount was
originally a loan, it can be considered to have become a gift or contribution when X cancelled and
returned the note to PNRC, a charitable organization.
On the other hand, the cash value of the promotions campaign cannot be claimed as a deduction.
Advertising expenses can only be deducted from the revenues where the expenses was incurred. In the
case at hand, PNRC is the revenue-producing entity not X. X did not derive any revenue. Thus, the cash
value of his promotions campaign cannot be claimed as deduction.
Finally, the cash value of the blood donated by X cannot be claimed as deduction. Blood has no monetary
value in this case as it is not disbursed in the form of expense.
ALTERNATIVE ANSWERS:
a) The value of the note qualifies as a contribution to a charitable institution which may be deducted
from gross income but only to the extent that it does not exceed 6% of his taxable income derived
from business.
X cannot claim deductions for the other items. Charitable and other contributions, to be deductible,
must actually have been paid, which is not true of the value of the advertising promotions, and must
represent some economic benefit to the recipient, which is not true of the blood donation.
b)

Section 29 as amended by RA 7496 allows the deduction of donation to an accredited relief
organization for the rehabilitation of calamity stricken areas declared by the President. Clearly, the
PNRC will qualify as donee relief organization. The P100,000.00 - note maybe allowed to the extent of
its cash value considering that the maker of the note is the donee itself. The rule is, donation made in
kind shall be determined at its fair market value as of the date such donations or gifts are made.
(Section 10 BIR-NEDA Regulation 1-81) The services rendered by the taxpayer to promote the show
and the 100 cc. blood may not be allowed because of the difficulty in getting the fair-market value of
these noncash donations.

Note:
If the donation is made before the effectivity of RA. 7496. It is deductible but subject to limitations under
Sec. 29 h (i) of the NIRC. (BAR 1993)
4. X is the proprietor of Vanguard, which is a security and detective agency. X was able to get the
contract to provide the security services of a government agency. He signed the Security
Agreement with the director of the government agency calling for the deployment of 100 security
guards on a 24 hour basis. The contract was revocable at the will of the director. To please the
director, X gives him at the end of the month P100,000.00 per guard hired. May X deduct from his
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income the money he paid to the director? Reasons.
ANSWER:
The money paid to please the director is not deductible. This is a form of bribery. Deductions shall not be
allowed if the expense is contrary to law, public policy or for immoral purposes (Zamora vs. Collector,
SCRA 163; Roxas vs. CTA, 23 SCRA 276).
ALTERNATIVE ANSWERS:
a) No. The money given to the director was paid merely “to please" him and was not paid for services
actually rendered and therefore does not qualify as compensation for services deductible as ordinary
and necessary expense. Moreover, deductions are allowable only if incurred for legal purposes.
b) No. A taxpayer may not deduct a business expense which is against the law or public policy. The
payment made to the director is a bribe given to a government employee. Bribery is a crime
punishable under the Revised Penal Code. (BAR 1993)

(a) Nature: ordinary and necessary
1. X is the Advertising 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’ hamburger. After Y agreed, both
X and Y 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, he sideswiped a pedestrian
who died as a result of the accident. X settled the case extrajudicially by paying the heirs of the
pedestrian P50.000.00. The money, however, came from Mang Douglas Hamburger, Inc. Discuss
whether the P50.000.00 can be claimed by Mang Douglas Hamburger, Inc. as an ordinary and
necessary expense.
ANSWER:
No. As the expenditure had not been incurred in carrying on his trade or business, the same cannot
be considered an ordinary and necessary expense for which deduction may be claimed. Such
expense is a personal expense which is not deductible from the gross income.
ALTERNATIVE ANSWERS:
(a) In the case of Helvering vs. Humpton (1935; CCA 9th 79F [2dl 358, it was held that:
“Restitution is ordinarily expected to be made by a person in the course of whose business a wrong is
committed, so that he may deduct the amount thereof as an ordinary and necessary’ business
expense."
In the case at bar, the money advanced by Mang Douglas Hamburger, Inc. to pay off the civil liability of X,
which arose from the accident after a business deal has been struck for Mang Douglas Hamburger, Inc.
was in fact reparation/restitution to the aggrieved heirs. However, the same cannot be considered as an
ordinary and deductible expense, since the law poses as a condition for its deductibility that the wrong or
tort should have been committed in the course of the business.
(b) If Mang Douglas Hamburger, Inc. treats the advances as salary or compensation of Y who is an
employee of Mang Douglas and withholds the corresponding tax thereon then there is a possibility of
deducting. (BAR 1993)

(b) Paid and incurred during taxable year
(c) Others (not in the syllabus)
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1. In order to facilitate the processing of its application for a license from a government office,
Corporation A found it necessary to pay the amount of Php 100,000 as a bribe to the approving
official. Is the Php 100,000 deductible from the gross income of Corporation A? On the other hand,
is the Php 100,000 taxable income of the approving official? Explain your answers. (5%)
SUGGESTED ANSWER:
Since the amount of Php 100,000 constitutes a bribe, it is not allowed as a deduction from gross income of
Corporation A- (Section 34(A)(1)(c), NIRC). However, to the recipient government official, the same
constitutes a taxable income. All income from legal or illegal sources are taxable absent any clear
provision of law exempting the same. This is the reason why gross income had been defined to include
income from whatever source derived. (Section 32(A), NIRC). Illegally acquired income constitutes
realized income under the claim of right doctrine (Rutkin v. US, 343 US 130). (BAR 2001)
2. MC Garcia, a contractor who won the bid for the construction of a public highway, claims as
expenses, facilitation fees which according to him is standard operating procedure in transactions
with the government. Are these expenses allowable as deduction from gross income? [5%]
SUGGESTED ANSWER:
No. The alleged facilitation fees which he claims as standard operating procedure in transactions with the
government comes in the form of bribes or "kickback” which are not allowed as deductions from gross
income (Section 34(A)(1)(c). NIRC). (BAR 1998)
b) Salaries, wages and other forms of compensation for personal services
actually rendered, including the grossed-up monetary value of the fringe
benefit subjected to fringe benefit tax which tax should have been paid
1. Gold and Silver Corporation gave extra 14th month bonus to all its official 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 ordinarily and necessary expense that should be allowed.
If you were the BIR Commissioner, how will you resolve the issue? 5%
SUGGESTED ANSWER:
I will rule against the deductibility of the bonus. The extra bonus is both not normal to the business and
unreasonable. Admittedly, there is no fixed test for determining the reasonableness of a bonus as an
additional compensation. This depends upon many factors such as: the payment must be made in good
faith; the character of the taxpayer’s business; the volume and amount of its net earnings; its locality; the
type and extent of the services rendered; the salary policy of the corporation; the size of the particular
business; the employees’ qualification and contributions to the business venture, and general economic
conditions (C.M Hoskins and Co., Inc. v. CIR, 30 SCRA 434 [1969]. Giving an extra bonus at a time that the
company suffers operating losses is not a payment in good faith and is not normal to the business, hence
unreasonable and would not qualify as ordinary and necessary expense. (BAR 2006)
c)
d)
e)
f)
g)
h)
i)
j)

Travelling/transportation expenses
Cost of materials
Rentals and/or other payments for use or possession of property
Repairs and maintenance
Expenses under lease agreements
Expenses for professionals
Entertainment/Representation expenses
Political campaign expenses
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1. X is a friend of Y, the chairman of Political Party Z, who wants to run for President in the 2004
elections. Knowing that Y needs funds for posters and streamers, X is thinking of donating to Y
P150,000.00 for his campaign. He asks you whether his intended donation to Y will be subject to
the donor’s tax. What would your answer be? Will your answer be the same if he were to donate to
Political Party Z instead of to Y directly?
SUGGESTED ANSWER:
The donation to Y, once he becomes a candidate for an elective post, is not subject to donor's tax provided
that he complies with the requirement of filing returns of contributions with the Commission on Elections
as required under the Omnibus Election Code.
The answer would be the same if X had donated the amount to Political Party Z instead of to Y directly
because the law places in equal footing any contribution to any candidate, political party or coalition of
parties for campaign purposes. (Section 99(C) of the 1997 Tax Code). (BAR 2003)
2. Are contributions to a candidate in an election subject to donor's tax? On the part of the
contributor, is it allowable as a deduction from gross income? [5%]
SUGGESTED ANSWER:
a) No. provided the recipient candidate had complied with the requirement for filing of returns of
contributions with the Commission on Elections as required under the Omnibus Election Code.
b) The contributor is not allowed to deduct the contributions because the said expense is not directly
attributable to, the development, management, operation and/or conduct of a trade, business or
profession (Sec. 34[Al(l)(a), NIRC). Furthermore, if the candidate is an incumbent government
official or employee, it may even be considered as a bribe or a kickback (Sec. 34[A](I)(c), NIRC).
Comment:
It is suggested that full credit should be given for any answer to the first question because the answer
requires an interpretation of the Election Code. Pursuant to the provisions of Section 99(C) of the NIRC,
the taxability of this type of contributions/donations is governed by the Election Code. (BAR 1998)
k) Training expenses
l) Advertising expenses
1. 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 s deduction from gross income, claiming it as an ordinary business expense. Is MFC
correct? Explain. (3%)
SUGGESTED ANSWER:
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, 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 fCIR v. General Foods Inc., 401 SCRA 545 [2003]). (BAR 2009)
(ii) Interest
1. A Co., a Philippine corporation. Issued preferred shares of stock with the following features:
1. Non-voting;
2. Preferred and cumulative dividends at the rate of 10% per annum, whether or not in any
period the amount is covered by earnings or projects;
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3. In the event of dissolution of the issuer, holders of preferred stock shall be paid in full or
ratably as the assets of the issuer may permit before any distribution shall be made to
common stockholders; and
4. The issuer has the option to redeem the preferred stock.
A Co. declared dividends on the preferred stock and claimed the dividends as interests’ deductible
from its gross income for income tax purposes. The BIR disallowed the deduction. A Co. maintains
that the preferred shares with their features are really debt and therefore the dividends are really
interests. Decide. (10%)
SUGGESTED ANSWER:
The dividends are not deductible from gross income. Preferred shares shall be considered capital
regardless of the conditions under which such shares is issued and, therefore, dividends paid thereon are
not considered interests which are allowed to be deducted from the gross income of the corporation.
(Revenue Memorandum Circular No. 17-71, July 12, 1971). (BAR 1999)
a) Requisites for deductibility
1. Pursuant to the National Internal Revenue Code, for interest to be deductible, what are the
requirements to be met? Explain.
ANSWER:
For interest to be deductible, the following requirements must be met:
(a) That there must be an indebtedness:
(b) That there is an interest on such indebtedness:
(c) Such interest was paid or accrued within the taxable year
(d) Interest was paid on a debt related to one’s profession, trade or business. (BAR 1992)
b) Non-deductible interest expense
1. Sometime in December 1980, a taxpayer donated to his son 3,000 shares of stock of San Miguel
Corporation. For failure to file a donor’s return on the donation within the statutory period, the
taxpayer was assessed the sum of PI02,000.00, as donor’s tax plus 25% surcharge or P25.500.00
and 20% interest or P20.400.00which he paid on June 24. 1985.
On April 10, 1986, he filed his income tax return for 1985 claiming among others, a deduction for
interest amounting to P9.500.00 and reported a taxable income of P96.000.00.
On November 10. 1986, the taxpayer filed an amended income tax return for the same calendar
year 1985, claiming therein an additional deduction in the amount of P20.400.00 representing
interest paid on the donor’s gift tax.
A claim for refund of alleged overpaid income tax for 1985 was filed with the Commissioner which
was subsequently denied.
Upon appeal with the Court of Tax Appeals, the Commissioner took Issue with the Court of Tax
Appeal’s determination that the amount paid by the taxpayer for interest on his delinquent taxes
is deductible from the gross income for the same year pursuant to Sec. 29 (b) (1) of the National
Internal Revenue Code.
The Commissioner of Internal Revenue pointed out that a tax is not an indebtedness. He argued
that there is a fundamental distinction between a “tax" and a "debt". According to the
Commissioner, the deductibility of “interest on indebtedness from a person’s income tax cannot
extend to interest on taxes."
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What is your opinion on the argument of the Commissioner that a tax is not an indebtedness so
that deductibility on the interest on taxes should not be allowed?
ANSWER:
The Commissioner’s argument is misplaced because the interest on the donor’s tax is not one that can be
considered as having been incurred in connection with the taxpayer’s trade, business or exercise of
profession.
ALTERNATIVE ANSWER:
c) While a tax may be considered a debt for purposes of deducting from gross income, the interest on
taxes cannot be so considered, as such interest is in the nature of a penalty, the imposition of which is
designed to discourage delinquent payment of taxes. To allow the deductibility of such interest would
be to diminish the punitive and deterrent effects of the imposition, and thus to diminish the
importance of the prompt payment of taxes.
d) The argument of the Commissioner is wrong. Because while a tax as a general rule is not a debt,
interest on a non-payment of a tax has been considered like interest on indebtedness by the Supreme
Court. (Note: Whether or not the interest is deductible under the present aw no apparently in
question). (BAR 1992)
c) Interest subject to special rules
(a) Interest paid in advance
(b) Interest periodically amortized
(c) Interest expense incurred to acquire property for use in
trade/business/profession
1. Explain if the following items are deductible from gross income for income tax purposes. Disregard
who is the person claiming the expense. (5%)
Interest on loans used to acquire capital equipment or machinery.
SUGGESTED ANSWER:
This is a deductible item from gross income. The law gives the taxpayer the option to claim as a deduction
or treat as capital expenditure interest incurred to acquire property used in trade, business or exercise of
a profession. (Section 34(B) (3), NIRC). (BAR 1999)

(iii) Taxes

(d) Reduction of interest expense/interest arbitrage

1. Distinguish between the legal concept of "taxes" and "debts".
ANSWER:
A tax may be considered a debt in the Civil Code sense for the following purposes:
a) Collection being enforced by court action:
b) Statute of limitations: and
c) Deduction from gross income.

Strictly speaking, however, a tax is not a debt in that there can be no set-off between the taxpayer and the
Government. (BAR 1992)
a) Requisites for deductibility
b) Non-deductible taxes
c) Treatments of surcharges/interests/fines for delinquency
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d) Treatment of special assessment
e) Tax credit vis-à-vis deduction
1. Congress enacts a law granting grade school and high school students a 10% discount on all schoolprescribed textbooks purchased from any bookstore. The law allows bookstores to claim in full the
discount as a tax credit.
2. Can the BIR require the bookstores to deduct the amount of the discount from their gross
income? Explain. 2.5%
SUGGESTED ANSWER:
2. No. Tax credit which reduces the tax liability is different from a tax deduction which merely reduces the
income to arrive at the tax base. Since the law allowed bookstores to claim in full the discount as a tax
credit, the BIR is not allowed to expand or contract the legislative mandate (CIR v. Central Luzon Drug
Corp., Id.). (BAR 2006)
(iv) Losses
a) Requisites for deductibility
1. Give the requisites for deductibility of a loss. [5%]
SUGGESTED ANSWER:
The requisites for deductibility of a loss are a) loss belongs to the taxpayer; b) actually sustained and
charged off during the taxable year; c) evidenced by a closed and completed transaction; d) not
compensated by insurance or other forms of indemnity; e) not claimed as a deduction for estate tax
purposes in case of individual taxpayers; and f) if it is a casualty loss it is evidenced by a declaration of loss
filed within 45 days with the BIR.
Comment:
The question is vague. There are different kinds of losses recognized as deductible under the Tax Code.
These are losses, in general (Sec. 34[D](I); net operating loss carryover (Sec. 34[D](3); capital losses (Sec.
34[D](4); Losses from wash sales of stocks or securities (Sec. 34[D](5) in relation to Sec. 38); wagering
losses (Sec. 34(D)(6); and abandonment losses (Sec. 34(D)(7). Losses are also deductible from the gross
estate (Sec. 86(A)(1)(e). NIRC).
Considering the time allotted for a five (5) point question is only nine (9) minutes, the candidates would
not be able to write down a complete answer. It is suggested that any answer which states the requisites
for the deductibility of any of the above losses be given full credit. (BAR 1998)
2. X is a travelling salesman in Jolo, Sulu. In the course of his travel, a band of MNLF seized his car by
force and used it to kidnap a foreign missionary. The next day, X learned that the military and the
MNLF band had a chance encounter. Using heavy weapons, the military fired at the MNLF band that
tried to escape with the use of X’s car. All the members of the band died and X’s car was a total
wreck. Can X deduct the value of his car from his income as casualty loss? Reasons.
ANSWER:
Sec. 29 (i) (c) of the National Internal Revenue Code provides that in cases of individual taxpayers, losses
to be deductible must be:
a) actually sustained and charged off within the taxable year;
b) have been incurred in trade, profession or business or in any transaction entered into for profit,
though not connected with trade, profession, or business;
c) Moreover, Sec. 1 of Revenue Regulations No. 12-77, defined casualty as complete or partial
destruction of property resulting from an Identifiable event of sudden, unexpected, or unusual nature.
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It denotes accidents, some sudden Invasion by hostile agency, and excludes progressive deterioration.
Based on the above-mentioned laws and the circumstances of the case at bar, the value of the wrecked car
is deductible as casualty loss, provided the regulations governing substantiation requirements for losses
are complied with.
ALTERNATIVE ANSWERS:
a) No. With respect to individuals engaged in business, the NIRC limits deductions only to certain direct
costs incurred In connection with the business, which costs, however, do not include casualty losses.
b) No. Section 29 of the NIRC, as amended by RA7496, better known as the SNTTS, does not include
among the allowable items of deductions for self-employed individuals like X, casualty losses even if
the property destroyed is used in business. A taxpayer claiming deduction must point to some specific
provision of the statute in which that deduction is authorized and must be able to prove that he is
entitled to the deduction which the law allows (Adas Consolidated Mining, 102 SCRA 246).

Note:
It depends. If he is an employee of a company, that is not deductible. On the other hand, if he is a
businessman it will be deductible to his gross income provided he can recover only up to the amount of
the casualty loss that does not exceed its book value, provided further, that it is not compensated by
insurance or otherwise.
Under the SNITS Law (R-A 7496) losses of any kind are no longer deductible from gross income of
individuals. (BAR 1993)
b) Other types of losses
(a) Capital losses
1. What is the rationale for the rule prohibiting the deduction of capital losses from ordinary gains?
Explain.
SUGGESTED ANSWER:
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 Tax Code).
ALTERNATIVE ANSWER:
The prohibition of deduction of capital losses from ordinary gains is designed to forestall the shifting of
deductions from an area subject to lower taxes to an area subject to higher taxes, thereby unnecessarily
resulting in leakage of tax revenues. Capital gains are generally taxed at a lower rate to prevent, among
others, the bunching of income in one taxable year which is a liberality in the law begotten from motives of
public policy (Rule on Holding Period). It stands to reason therefore, that if the transaction results in loss,
the same should be allowed only from and to the extent of capital gains and not to be deducted from
ordinary gains which are subject to a higher rate of income tax. (Chirelstein, Federal Income Taxation,
1977 Ed.) (BAR 2003)
(b) Securities becoming worthless
1. Explain if the following items are deductible from gross income for income tax purposes. Disregard
who is the person claiming the deduction. (5%)
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Worthless securities
SUGGESTED ANSWER:
Worthless securities, which are ordinary assets, are not allowed as deduction from gross income because
the loss is not realized. However, if these worthless securities are capital assets, the owner is considered to
have incurred a capital loss as of the last day of the taxable year and, therefore, deductible to the extent of
capital gains. (Section 34(D)(4), NIRC). This deduction, however, is not allowed to a bank or trust
company. (Section 34(B)(2), NIRC). (BAR 1999)
(c) Losses on wash sales of stocks or securities
(d) Wagering losses
(e) Net Operating Loss Carry-Over (NOLCO)
(v) Bad debts
1. PQR Corp. claimed as a deduction in its tax returns the amount of PI, 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 hold in determining whether or not the
debts are bad debts?" Answer and explain briefly. (5%)
SUGGESTED ANSWER:
In order that debts be considered as bad debts because they have become worthless, the taxpayer
should establish that during the year for which the deduction is sought, a situation developed as a
result of which it became evident in the exercise of sound, objective business judgment that there
remained no practical, but only vaguely theoretical, prospect that the debt would ever be paid
(Collector of Internal Revenue v. Goodrich International Rubber Co*, 21 SCRA 1336 [1967/).
"Worthless" is not determined by an inflexible formula or slide rule calculation, but upon the
exercise of sound business judgment. The factors to be considered include, but are not limited to,
the following:
1.
2.
3.
4.

The debtor has neither property nor visible income;
The debtor has been adjudged bankrupt or insolvent;
Collateral shares have become worthless; and
There are numerous debtors with small amounts of debts and further action on the accounts
would entail expenses exceeding the amounts sought to be collected.

ALTERNATIVE ANSWER:
The following are the factors to be considered in determining whether or not the debts are bad debts:
1.
2.
3.
4.

The debt must be valid and subsisting;
The debt is connected with the taxpayer's â–  trade or business, and is not between related
parties;
There is an actual ascertainment that the debt is worthless; and
The debt is charged-off within the taxable year. (PRC v. CA, 256 SCRA 667 11996]; Revenue
Regs. No. 5-99). (BAR 2004)

2. Explain if the following items are deductible from gross income for income tax purposes. Disregard
who is the person claiming the deduction. (5%)
Reserves for bad debts.
SUGGESTED ANSWER:
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Reserve for bad debts are not allowed as deduction from gross income. Bad debts must be charged off
during the taxable year to be allowed as deduction from gross income. The mere setting up of reserves will
not give rise to any deduction. (Section 34(B), NIRC). (BAR 1999)
a) Requisites for deductibility
b) Effect of recovery of bad debts
1. Explain briefly whether the following items are taxable or non- taxable:
Recovery of bad debts previously charged off;
SUGGESTED ANSWER:
Recovery of bad debts previously charged off is taxable to the extent of income tax benefit of said
deduction. (Sec. 34(E)(1), NIRC). (BAR 2005)
(vi) Depreciation
1. Explain if the following items are deductible from gross income for income tax purposes. Disregard
who is the person claiming the expense. (5%)
Depreciation of goodwill.
SUGGESTED ANSWER:
Depreciation for goodwill is not allowed as deduction from gross income. While intangibles maybe
allowed to be depreciated or amortized, it is only allowed to those intangibles whose use in the business
or trade is definitely limited in duration. (Basilan Estates, Inc. v. CIR, 21 SCRA 17). Such is not the case with
goodwill.
ALTERNATIVE ANSWER:
Depreciation of goodwill is allowed as a deduction from gross income if the goodwill is acquired through
capital outlay and is known from experience to be of value to the business for only a limited period.
(Section 107, Revenue Regulations No. 2). In such case, the goodwill is allowed to be amortized over its
useful life to allow the deduction of the current portion of the expense from gross income, thereby paving
the way for a proper matching of costs against revenues which is an essential feature of the income tax
system. (BAR 1999)
2. Mr. Domingo owns a vacant parcel of land. He leases the land to Mr. Enriquez for ten years at a
rental of P12,000.00 per year. The condition is that Mr. Enriquez will erect a building on the land
which will become the property of Mr. Domingo at the end of the lease without compensation or
reimbursement whatsoever for the value of the building.
Mr. Enriquez erects the building. Upon completion the building had a fair market value of PI
Million. At the end of the lease the building is worth only P900.000.00 due to depreciation.
Will Mr. Domingo have income when the lease expires and becomes the owner of the building with
a fair market value of P900.000.00? How much income must he report on the building? Explain.
ANSWER:
When a building is erected by a lessee in the leased premises in pursuance of an agreement with the lessor
that the building becomes the property of the lessor at the end of the lease, the lessor has the option to
report income as follows:
a) The lessor may report as income the market value of the building at the time when such building is
completed; or
Page | 100

b) The lessor may spread over the life of the lease the estimated depreciated value of such building at the
termination of the lease and report as income for each year of the lease an aliquot part thereof (Sec.
49, RR No. 2).
Under the first option, the lessor will have no income when the lease expires and becomes the owner of
the building. The second option will give rise to an income during the year of lease expiration of
P90.000.00 or 1/10 of the depreciated value of the building.
The availment of the first option will require Mr. Domingo to report an income of PI,000,000.00 during the
year when the building was completed. A total of P900.000.00 income will be reported under the second
option but will be spread over the life of the lease or P90.000.00 per year.
ALTERNATIVE ANSWER:
Mr. Domingo will realize an income when the lease expires and becomes the owner of the building with a
fair market value of P900.000.00 because the condition for the lease is the transfer of the building at the
expiration of the lease. The income to be realized by Mr. Domingo at the time of the expiration will consist
of the value of the building which is P900.000.00 and any rental income that has accrued as of said date.
(BAR 1995)
a) Requisites for deductibility
b) Methods of computing depreciation allowance
1. What is the proper allowance for depreciation of any property used in trade or business? (3%]
What is the annual depreciation of a depreciable fixed asset with a cost of P100.000 and an
estimated useful life of 20 years and salvage value of P10,000 after its useful life? [2%]
SUGGESTED ANSWER:
1. The proper allowance of depreciation of any property used in trade or business refers to the
reasonable allowance for the exhaustion, wear and tear (including reasonable allowance for
obsolescence) of said property. The reasonable allowance shall Include, but not limited to, an
allowance computed under any of the following methods: a) straight-line method; b) decliningbalance method; c) sum-of-years-dlgit method; and d) any other method which may be prescribed by
the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue (Sec. 34(F),
NIRC).
2. The annual depreciation of the depreciable fixed asset may be computed on the straight-line method
which will allow the taxpayer to deduct an annual depreciation of Php4,500, arrived at by dividing the
depreciable value (Php 100,000-Php10,000) of Php90,000 by the estimated useful life (20 years).
Note:
The bar candidate may give a different figure depending on the method he used in computing the annual
depreciation. The facts given in the problem are sufficient to compute the annual depreciation either
under the declining-balance method or sum-of-years-digit method. Any answer arrived at by using any of
the recognized methods should be given full credit. It is suggested that no question requiring computation
should be given in future bar examinations. (BAR 1998)
(a) Straight-line method
(b) Declining-balance method
(c) Sum-of-the-years-digit method
(vii) Charitable and other contributions
a) Requisites for deductibility
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1. In order that donations to non-stock, non-profit educational Institution may be exempt from the
donor’s gift tax, what conditions must be met by the donee? (3%)
SUGGESTED ANSWER:
In order that donations to non-stock, non-profit educational institution may be exempt from the donor’s
gift tax, it is required that not more than 30% of the said gifts shall be used by the donee-institution for
administration purposes. (Sec. 101(A)(3), NIRC). (BAR 2002)
b) Amount that may be deducted
1. On December 06, 2001, LVN Corporation donated a piece of vacant lot situated in Mandaduyong
City to an accredited and duty registered non-stock, non-profit educational institution to be used
by the latter in building a sports complex for students.
May the donor claim in full as deduction from its gross income for the taxable year 2001 the
amount of the donated lot equivalent to its fair market value/zonal value at the time of the
donation? Explain your answer. (2%)
SUGGESTED ANSWER:
No. Donations and/or contributions made to qualified donee institutions consisting of property other than
money shall be based on the acquisition cost of the property. The donor is not entitled to claim as full
deduction the fair market value/zonal value of the lot donated. (Sec. 34(H), NIRC). (BAR 2002)
Contributions to pension trusts
a) Requisites for deductibility
(ix) Deductions under special laws
(x) Optional standard deduction
a) Individuals, except non-resident aliens
(viii)

1. 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? (4%)
SUGGESTED ANSWER:
No. Since Ernesto has elected to claim the optional standard deduction, said election is irrevocable for the
taxable year for which the return is made (Section 34(L), NIRC). (BAR 2009)
b) Corporations, except non-resident foreign corporations
c) Partnerships
(xi) Personal and additional exemption (R.A. No. 9504, Minimum Wage Earner Law)
1. Distinguish Allowable Deductions from Personal Exemptions. Give an example of an allowable
deduction and another example for personal exemption. (5%)
SUGGESTED ANSWER:
The distinction between allowable deductions and personal exemptions are as follows:
1. As to amount — Allowable deductions generally refer to actual expenses incurred in the pursuit of
trade, business or practice of profession while personal exemptions are arbitrary amounts allowed
by law.
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2. As to nature — Allowable deductions constitute business expenses while personal exemptions
pertain to personal expenses.
3. As to purpose — Deductions are allowed to enable the taxpayer to recoup his cost of doing
business while personal exemptions are allowed to cover personal, family and living expenses.
4. As to claimants — Allowable deductions can be claimed by all taxpayers, corporate or otherwise,
while personal exemptions can be claimed only by individual taxpayers. (BAR 2001)
a) Basic personal exemptions
1. Charlie, a widower, has two sons by his previous marriage. Charlie lives with Jane who is legally
married to Mario. They have a child name Jill. The children are all minors and not gainfully
employed.
How much personal exemption can Charlie claim? Explain. 2.5%
SUGGESTED ANSWER:
Charlie can claim the personal exemption of a Head of a Family or P25,000.00 provided that, at least one of
his minor and not gainfully employed children is unmarried and living with and dependent upon him for
chief support (Sec. 35(A)t NIRC). (BAR 2006)
2. Maria Clara, a Filipino citizen, married Ha Wa, a Hongkong national in 1988 in Hongkong. In 1989,
the two separated and Maria returned to the Philippines. The two lost contact with each other. In
1990, Maria filed her income tax return and claimed a personal exemption of P12.000.00 under
Sec. 21(a) of the Tax Code. Decide.
ANSWER:
Maria may file a separate return as a married individual because it is impossible to file a consolidated
return. However, according to Section 29 of the NIRC prior to the effectivity of R.A. 7167, husband and
wife electing to compute their income tax separately shall be entitled to a personal exemption of
P6.000.00 each.
ALTERNATIVE ANSWERS:
a) Revenue Regulations No. 1-92. prescribing the implementing guidelines for R.A. No. 7167. provides
that the new basic personal exemptions of individuals taxpayers are as follows:
1. For single individual or married individuals but Judicially decreed as legally separated with no
qualified dependents - P9.000.00.
2. For married couples with both spouses employed- P9.000.00
3. For married couples with only one spouse employed - P 18,000.00.
4. For head of the family - P 12,000.00.
Based on the foregoing provisions of law, Maria's claim of P 12,000.00 as personal exemption cannot
be allowed. While she is married and not judicially separated, it does not appear that she has
dependents to qualify her as head of the family and to entitle her to the claim of P12,000.00 personal
exemption.
b) Not being legally separated. Maria may claim a higher personal exemption of PI8.000.00 for married
individuals, and not merely PI2,000.00 which applies to the Head of a Family. The exemption for the
Head of a Family requires that one be unmarried or legally separated, which Maria Clara is not.
c) Maria may not claim the PI2,000.00 personal exemption as head of the family in accordance with
Section 29 of the NIRC as amended by RA 7167 and RA 7496. The Supreme Court ruled in the case of
Umali v. Estanislao (209 SCRA446) that the increased personal exemptions shall take effect on January
Page | 103

29, 1992 and shall be applied on income earned for taxable year 1991. (BAR 1993)
b) Additional exemptions for taxpayer with dependents
1. Charlie, a widower, has two sons by his previous marriage. Charlie lives with Jane who is legally
married to Mario. They have a child name Jill. The children are all minors and not gainfully
employed.
How much additional exemption can Charlie claim? Explain. 2.5%
SUGGESTED ANSWER:
Each legitimate children from his previous marriage and his illegitimate child with Jane entitled him to
additional personal exemption of P8.000.00 for each dependent, if apart from being minor and not
gainfully employed, they are unmarried, living with and dependent upon Charlie for their chief support
(Sec. 35(B), NIRC). (BAR 2006)
2. Arnold, who is single, cohabits with Vilma, who is legally married to Zachary. Arnold and Vilma
have six minor children who live and depend upon Arnold for their chief support. The children are
not married and not gainfully employed.
1. For income tax purposes, may Arnold be considered as “head of a family?" [3%]
2. Is Arnold entitled to deduct from his gross income, an additional exemption for each of his
illegitimate child? [2%]
SUGGESTED ANSWER:
1. Yes. An unmarried man who has illegitimate minor children who live with him and depend upon
him for their chief support is considered as “head of the family" (RR No. 2-98 implementing
Section 35, NIRC).
2. No. Arnold is only entitled to deduct additional personal exemption for four (4) out of the six (6)
illegitimate children. The maximum number of dependents for purposes of the additional personal
exemption is four. (Sec. 35, NIRC). (BAR 1998)
c) Status-at-the-end-of-the-year rule
1. RAM got married to LISA last January 2003. On November 30, 2003, LISA gave birth to twins.
Unfortunately, however, USA died in the course of her delivery. Due to complications, one of the
twins also died on December 15, 2003.
In preparing his Income Tax Return (TTR) for the year 2003, what should RAM indicate in the ITR
as his civil status:
(a) single; (b) married; (c) Head of the family; (d) widower, (e) none of the above? Why? Reason.
(5%)
SUGGESTED ANSWER:
RAM should indicate (b) married” as his civil status in preparing his Income Tax Return for the year 2003.
The death of his wife during the year will not change his status because should the spouse die during the
taxable year, the taxpayer may still claim the same exemptions (that of being married) as if the spouse
died at the close of such year (Section 35[C], NIRC). (BAR 2004)
2. Mar and Joy got married in 1990. A week before their marriage, Joy received, by way of donation, a
condominium unit worth P750.000.00 from her parents. After marriage, some renovations were
made at a cost of PI50,000.00. The spouses were both employed in 1991 by the same company. On
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30 December 1992, their first child was bom, and a second child was bom on 07 November 1993. In
1994, they sold the condominium unit and bought a new unit.
Under the foregoing facts, what were the events in the life of the spouses that had income tax
incidences?
ANSWER:
The events in the life of spouses Mar and Joy which have income tax incidences are the following:
(a) Their marriage in 1990 qualifies them to claim personal exemption for married individuals;
(b) Their employment in 1991 by the same company will make them liable to the income tax imposed
on gross compensation income;
(c) Birth of their first child in December 1992 would give rise to an additional exemption of P5.000 for
taxable year 1992;
(d) Birth of their second child in November 1993 would likewise entitle them to claim additional
exemption of P5, 000 raising their additional personal exemptions to P10,000 for taxable year
1993; and Sale of their condominium unit in 1994 shall make the spouses liable to the 5% capital
gains tax on the gain presumed to have been realized from the sale. (BAR 1997)
d) Exemptions claimed by non-resident aliens
1. 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.
SUGGESTED ANSWER:
FALSE. [Sec. 25(A)(1) in relation to Sec. 35, NIRC.)
(xii) Items not deductible
a) General rules
b) Personal, living or family expenses
c) Amount paid for new buildings or for permanent improvements (capital
expenditures)
d) Amount expended in restoring property (major repairs)
e) Premiums paid on life insurance policy covering life or any other officer or
employee financially interested
1. 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.
SUGGESTED ANSWER:
FALSE [Sec. 34(M), NIRC.]
2. OXY is the president and chief executive officer of ADD Computers* Inc. When OXY was asked to
join the government service as director of a 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. Is said premium deductible by ADD
Computers, Inc.? Reason. (5%)
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SUGGESTED ANSWER:
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 [1940D. 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 (Section 34[A][1][c], NIRC).
On the other hand, if the company was made the beneficiary, whether directly or indirectly, the premium
is not allowed as a deduction from gross income (Section 36[A][4], NIRC). (BAR 2004)
f) Interest expense, bad debts, and losses from sales of property between
related parties
g) Losses from sales or exchange or property
h) Non-deductible interest
i) Non–deductible taxes
j) Non-deductible losses
k) Losses from wash sales of stock or securities
h. Exempt corporations
(1) Propriety educational institutions and hospitals
(2) Government-owned or controlled corporations
(3) Others
10. Taxation of resident citizens, non-resident citizens, and resident aliens
a. General rule that resident citizens are taxable on income from all sources within and without
the Philippines
b. Non-resident citizens
1. Mr. Cortez is a non-resident alien based in Hong Kong. During the calendar year 1999, he came to
the Philippines several times and stayed in the country for an aggregated period of more than 180
days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and
from abroad? (5%)
SUGGESTED ANSWER:
Mr. Cortez being a non-resident alien individual who has stayed for an aggregated period of more than
180 days during the calendar year 1999, shall for that taxable year be deemed to be a non-resident alien
doing business in the Philippines.
Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as an individual
citizen and a resident alien individual, on taxable income received from all sources within the Philippines.
[Sec. 25 (A) (1). NIRC of 1997]
Thus, he is allowed to avail of the itemized deductions including the personal and additional exemptions
but subject to the rule on reciprocity on the personal exemptions. [Sec. 34 (A) to (J) and (M) in relation to
Sec. 25 (A) (1), Ibid. Sec. 35 (D), Ibid.]
Note:
It is suggested that full credit should be given if the examinee’s answer only cover the first two
paragraphs. (BAR 2000)
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2. A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen. A Co. has a subsidiary
in Hong Kong (HK Co.) and will assign P for an indefinite period to work full time for HK Co. P will
bring his family to reside in HK and will lease out his residence in the Philippines. The salary of P
will be shouldered 50% by A Co. while the other 50% plus housing, cost of living and educational
allowances of P's dependents will be shouldered by HK Co. A Co.- will credit the 50% of P’s salary to
P’s Philippine bank account. P will sign the contract of employment in the Philippines. P will also
be receiving rental income for the lease of his Philippine residence.
Are these salaries, allowances and rentals subject to the Philippine income tax? (5%)
SUGGESTED ANSWER:
The salaries and allowances received by P are not subject to Philippine income tax. P qualifies as a nonresident citizen because he leaves the Philippines for employment requiring him to be physically present
abroad most of the time during the taxable year. (Section 22(E), NIRC). A non-resident citizen is taxable
only on income derived from Philippine sources. (Section 23, NIRC). The salaries and allowances received
from being employed abroad are incomes from without because these are compensation for services
rendered outside of the Philippines. (Section 42, NIRC).
However, P is taxable on rental income for the lease of his Philippine residence because this is an income
derived from within, the leased property being located in the Philippines. (Section 42, NIRC). (BAR 1999)
c. Taxation on compensation income
(1) Inclusions
(i) Monetary compensation
a) Regular salary/wage
b) Separation pay/retirement benefit not otherwise exempt
c) Bonuses, 13th month pay, and other benefits not exempt
d) Director’s fees
(ii) Non-monetary compensation
a) Fringe benefit not subject to tax
1. X was hired by Y to watch over Y’s fishponds with a salary of Php 10,000.00. To enable him to
perform his duties well, he was also provided a small hut, which he could use as his residence in
the middle of the fishponds. Is the fair market value of the use of the small hut by X a "fringe
benefit" that is subject to the 32% tax imposed by Section 33 of the National Internal Revenue
Code? Explain your answer. (5%)
SUGGESTED ANSWER:
No. X is neither a managerial nor a supervisory employee. Only managerial or supervisory employees are
entitled to a fringe benefit subject to the fringe benefits tax. Even assuming that he is a managerial or
supervisory employee, the small hut is provided for the convenience of the employer, hence does not
constitute a taxable fringe benefit. (Section 33, NIRC). (BAR 2001)
2. X is employed as a driver of a corporate lawyer and receives a monthly salary of P5,000.00 with
free board and lodging with an equivalent value of P1,500.00.
1) What will be the basis of X’s income tax.
2) Will your answer in question (a) be the same if X's employer is an obstetrician? Why?
ANSWER:
1) The basis of X’s income tax would depend on whether his employer is an employee or a practising
corporate lawyer. If his employer is an employee, the basis of X’s income tax is P6,500.00 equivalent to
the total of the basic salary and the value of the board and lodging. This is so because the
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employer/corporate lawyer has no place of business where the free board and lodging may be given.
On the other hand, if the corporate lawyer is a practicing lawyer (self-employed), X should be taxed
only on P5.000.00 provided that the free board and lodging is given in the business premises of the
lawyer and for his convenience and that the free lodging was given to X as a condition for employment.
2) If the employer is an obstetrician who is self-employed, the basis of X’s income will only be P5.000.00
if it is proven that the free board and lodging is given within the business premises of said employer
for his convenience and that the free lodging is required to be accepted by X as condition for
employment. Otherwise, X would be taxed on P6.500.00. (BAR 1996)
3. Mr. Adrian is an executive of a big business corporation. Aside from his salary, his employer
provides him with the following benefits: free use of a residential house in an exclusive
subdivision, free use of a limousine and membership in a country club where he can entertain
customers of the corporation.
Which of these benefits, if any, must Mr. Adrian report as income? Explain.
ANSWER:
Mr. Adrian must report the imputed rental value of the house and limousine as income. If the rental value
exceeds the personal needs of Mr. Adrian because he is expected to provide accommodation in said house
for company guests or the car is used partly for business purpose, then Mr. Adrian is entitled only to a
ratable rental value of the house and limousine as exclusion from gross income and only a reasonable
amount should be reported as income. This is because the free housing and use of the limousine are given
partly for the convenience and benefit of the employer (Collector vs. Henderson).
ALTERNATIVE ANSWER:
Remuneration for service although not given in the form of cash constitutes compensation income.
Accordingly, the value for the use of the residential house is part of his compensation income which he
must report for income tax purposes. However, if the residential house given to Mr. Adrian for his free use
as an executive is also used for the benefit of the corporation/employer, such as for entertaining
customers of the corporation, only 50% of the rental value or depreciation (if the house is owned by the
corporation) shall form part of compensation income (RAMO 1-87).
The free use of a limousine and the membership in a country dub is not part of Mr. Adrian's compensation
income because they were given for the benefit of the employer and are considered to be necessary
incidents for the proper performance of his duties as an executive of the corporation.
The membership fee in the country club needs to be reported as income. It appears that the membership
of Mr. Adrian to the country club is primarily for the benefit and convenience of the employer. This is to
enable Mr. Adrian to entertain company guests (Collector vs. Henderson). (BAR 1995)
4. Capt. Canuto is a member of the Armed Forces of the Philippines. Aside from his pay as captain, the
government gives him free uniforms, free living quarters in whatever military camp he is assigned,
and free meals inside the camp.
Are these benefits income to Capt. Canuto? Explain.
ANSWER:
No, the free uniforms, free living quarters and the free meals inside the camp are not income to Capt.
Canuto because these are facilities or privileges furnished by the employer for the employer's convenience
which are necessary incidents to proper performance of the military personnel's duties. (BAR 1995)
5. X is employed as security guard of Excel Supermarket, Inc. X lives in a room within the compound
of Excel but he is not charged any rent. The rental value of the room is P300.00 a month. X wants
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your opinion on whether BIR can tax the value of the free use of his room.
ANSWER:
The rental value of the room is not taxable. Section 2.2 of the Revenue Audit Memo Order No. 1-87
provides that if the lodging is furnished in the business premises of the employer and the employee is
required to accept such lodging as a condition of his employment, then the value of said lodging will be
not taxable. It is merely for the convenience, comfort and pleasure of the employer.
ALTERNATIVE ANSWER:
a) The BIR may not tax the value of the free use of the room, as the same may not strictly be considered
compensation income. Considering the nature of X’s employment and the fact that free lodging was
furnished within the business premises, it may reasonably be said that the benefit therefrom inured to
the employer more than to X and thus may not actually be considered remuneration for services
included in the computation of taxable income.
b) It depends. If the lodging furnished to employee-X is within the business premises of the employer
and the employee is required to accept the lodging as condition for employment the imputed rental
value of the room used by X shall be excluded from X's compensation income (BIR Audit Memo 1-87).
(BAR 1993)

(2) Exclusions
(i) Fringe benefit subject to tax
(ii) De minimis benefits
1. 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 supervisors 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.
SUGGESTED ANSWER:
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 PI,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). (BAR 2007)
2. State with reasons the tax treatment of the following in the preparation of annual- income tax
returns:
De minimis benefits;
SUGGESTED ANSWER:
De minimis benefits are non-taxable fringe benefits. They are not to be reported in the income tax return
because they are tax exempt. They are also exempt from the imposition of the fringe benefits tax. (Sec.
33(C), NIRC). (BAR 2005)
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(iii) 13th month pay and other benefits, and payments specifically excluded from
taxable compensation income
1. State with reasons the tax treatment of the following in the preparation of annual- income tax
returns:
13th month pay
SUGGESTED ANSWER:
13th month pay is excluded from the gross income for income tax purposes to the extent of P30,000.00.
Any excess will be included in the gross income per income tax return as part of gross compensation
income. (Sec. 32(B)(7)(e), NIRC). (BAR 2005)
(3) Deductions
1. 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. (3%)
SUGGESTED ANSWER:
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 employeremployee relationship are not allowed to claim deduction except that allowed under Section 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).
2. Taxpayers whose only income consist of salaries and wages from their employers have long been
complaining that they are not allowed to deduct any item from their gross income for purposes of
computing their net taxable income. With the passage of the Comprehensive Tax Reform Act of
1997, is this complaint still valid? Explain your answer. (5%)
SUGGESTED ANSWER:
No more. Gross compensation income earners are now allowed at least an item of deduction in the form of
premium payments on health and/or hospitalization insurance in an amount not exceeding P2.400 per
annum [Section 34(M)]. This deduction is allowed if the aggregate family income do not exceed P250.000
and by the spouse, in case of married individual, who claims additional personal exemption for
dependents. (BAR 2001)
(i) Personal exemptions and additional exemptions
1. Charlie, a widower, has two sons by his previous marriage. Charlie lives with Jane who is legally
married to Mario. They have a child name Jill. The children are all minors and not gainfully
employed.
How much personal exemption can Charlie claim? Explain. 2.5%
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SUGGESTED ANSWER:
Charlie can claim the personal exemption of a Head of a Family or P25,000.00 provided that, at least one of
his minor and not gainfully employed children is unmarried and living with and dependent upon him for
chief support (Sec. 35(A)t NIRC).
How much additional exemption can Charlie claim? Explain. 2.5%
SUGGESTED ANSWER:
Each legitimate children from his previous marriage and his illegitimate child with Jane entitled him to
additional personal exemption of P8.000.00 for each dependent, if apart from being minor and not
gainfully employed, they are unmarried, living with and dependent upon Charlie for their chief support
(Sec. 35(B), NIRC). (BAR 2006)
2. Distinguish Allowable Deductions from Personal Exemptions. Give an example of an allowable
deduction and another example for personal exemption. (5%)
SUGGESTED ANSWER:
The distinction between allowable deductions and personal exemptions are as follows:
1. As to amount — Allowable deductions generally refer to actual expenses incurred in the pursuit of
trade, business or practice of profession while personal exemptions are arbitrary amounts allowed
by law.
2. As to nature — Allowable deductions constitute business expenses while personal exemptions
pertain to personal expenses.
3. As to purpose — Deductions are allowed to enable the taxpayer to recoup his cost of doing
business while personal exemptions are allowed to cover personal, family and living expenses.
4. As to claimants — Allowable deductions can be claimed by all taxpayers, corporate or otherwise,
while personal exemptions can be claimed only by individual taxpayers. (BAR 2001)
3. Arnold, who is single, cohabits with Vilma, who is legally married to Zachary. Arnold and Vilma
have six minor children who live and depend upon Arnold for their chief support. The children are
not married and not gainfully employed.
(a) For income tax purposes, may Arnold be considered as “head of a family?" [3%]
(b) Is Arnold entitled to deduct from his gross income, an additional exemption for each of his
illegitimate child? [2%]
SUGGESTED ANSWER:
(a) Yes. An unmarried man who has illegitimate minor children who live with him and depend upon
him for their chief support is considered as “head of the family" (RR No. 2-98 implementing
Section 35, NIRC).
(b) No. Arnold is only entitled to deduct additional personal exemption for four (4) out of the six (6)
illegitimate children. The maximum number of dependents for purposes of the additional personal
exemption is four. (Sec. 35, NIRC). (BAR 1998)
4. Maria Clara, a Filipino citizen, married Ha Wa, a Hongkong national in 1988 in Hongkong. In 1989,
the two separated and Maria returned to the Philippines. The two lost contact with each other. In
1990, Maria filed her income tax return and claimed a personal exemption of P12.000.00 under
Sec. 21(a) of the Tax Code. Decide.
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ANSWER:
Maria may file a separate return as a married individual because it is impossible to file a consolidated
return. However, according to Section 29 of the NIRC prior to the effectivity of R.A. 7167, husband and
wife electing to compute their income tax separately shall be entitled to a personal exemption of
P6.000.00 each.
ALTERNATIVE ANSWERS:
Revenue Regulations No. 1-92. prescribing the implementing guidelines for R.A. No. 7167. provides that
the new basic personal exemptions of individuals taxpayers are as follows:
1. For single individual or married individuals but Judicially decreed as legally separated with no
qualified dependents - P9.000.00.
2. For married couples with both spouses employed- P9.000.00
3. For married couples with only one spouse employed - P 18,000.00.
4. For head of the family - P 12,000.00.
Based on the foregoing provisions of law, Maria's claim of P 12,000.00 as personal exemption cannot be
allowed. While she is married and not judicially separated, it does not appear that she has dependents to
qualify her as head of the family and to entitle her to the claim of P12,000.00 personal exemption.
a)

Not being legally separated. Maria may claim a higher personal exemption of PI8.000.00 for
married individuals, and not merely PI2,000.00 which applies to the Head of a Family.
The exemption for the Head of a Family requires that one be unmarried or legally
separated, which Maria Clara is not.

b)

Maria may not claim the PI2,000.00 personal exemption as head of the family in accordance
with Section 29 of the NIRC as amended by RA 7167 and RA 7496. The Supreme Court
ruled in the case of Umali v. Estanislao (209 SCRA446) that the increased personal
exemptions shall take effect on January 29, 1992 and shall be applied on income
earned for taxable year 1991. (BAR 1993)
(ii) Health and hospitalization insurance
(iii) Taxation of compensation income of a minimum wage earner
a) Definition of statutory minimum wage
b) Definition of minimum wage earner
c) Income also subject to tax exemption: holiday pay, overtime pay, night-shift
differential, and hazard pay
d. Taxation of business income/income from practice of profession
e. Taxation of passive income
(1) Passive income subject to final tax
(i) Interest income

1. 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 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. (4%)
SUGGESTED ANSWER:
a) Yes. The Interest income from the peso bank deposit is subject to 20% final withholding tax. The
interest income from the dollar deposit is subject to 7.5% final withholding tax but only on the portion
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of the interest attributable to Judy or $500. The interest on the dollar deposit attributable to Renato, a
non-resident, is exempt from income tax. (Section 24(B)(1), NIRC).
b) Is the bank correct in withholding the 20% final tax on the entire interest income? Explain.
(3%)
SUGGESTED ANSWER:
b) No. Only the interest income on a peso deposit is subject to 20%. The interest income from a dollar
deposit is subject to 7.5% if the earner is a resident individual. (Section 24(B), NIRC). (BAR 2008)
2. State with reasons the tax treatment of the following in the preparation of annual- income tax
returns:
Interest on deposits with (i) BPI Family Bank; and (ii) a local offshore banking unit of a foreign
bank;
SUGGESTED ANSWER:
Interest on deposit with BPI Family Bank is a passive income subject to a final withholding tax rate of
20%; the interest on deposit with a local offshore banking unit of a foreign bank is a passive income
subject to a final withholding tax rate of 7.5%. (Sec. 24(B)(1), NIRC). Both interest incomes are not to be
declared as part of gross income in the income tax return. (BAR 2005)
a) Treatment of income from long-term deposits
(ii) Royalties
(iii) Dividends from domestic corporations
1. On 03 January 1998, X, a Filipino citizen residing in the Philippines, purchased one hundred (100)
shares in the capital stock of Y Corporation, a domestic company. On 03 January 2000, Y
Corporation declared, out of the profits of the company earned after 01 January 1998, a hundred
percent (100%) stock dividends on all stockholders of record as of 31 December 1999 as a result
of which X holding in Y Corporation became two hundred (200) shares.
Are the stock dividends received by X subject to income tax? Explain.
SUGGESTED ANSWER:
No. Stock dividends are not realized income. Accordingly, the different provisions of the Tax Code
imposing a tax on dividend income only includes within its purview cash and property dividends making
stock dividends exempt from income tax. However, if the distribution of stock dividends is the equivalent
of cash or property, as when the distribution results in a change of ownership interest of the shareholders,
the stock dividends will be subject to income tax. (Section 24(B)(2); Section 25(A)&(B); Section
28(B)(5)(b), 1997 Tax Code) (BAR 2003)
2. During the year, a domestic corporation derived the following items of revenue: (a) gross receipts
from a trading business: (b) interests from money placements in the banks; (c) dividends from its
stock investments in domestic corporations; (d) gains from stock transactions through the
Philippine Stock Exchange; (e) proceeds under an insurance policy on the loss of goods.
In preparing the corporate income tax return, what should be the tax treatment on each of the
above items?
ANSWER:
The gross receipts from trading business is includible as an item of income in the corporate income tax
return and subject to corporate income tax rate based on net income. The other items of revenue will not
be included in the corporate income tax return. The interest from money market placements is subject to a
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final withholding tax of 20%; dividends from domestic corporation are exempt from income tax; and gains
from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu
of the income tax. The proceeds under an insurance policy on the loss of goods is not an item of income
but merely a return of capital hence not taxable.
ALTERNATIVE ANSWER:
The gross receipts from trading business are includible as an item of income in the corporate income tax
return. Likewise, the gain or loss realized as a consequence of the receipt of proceeds under an insurance
policy on the loss of goods will be included in the corporate income tax return either as a taxable gain or a
deductible loss. The gain or loss is arrived at by deducting from the proceeds of insurance (amount
realized) the basis of the good lost (Sec. 34(a). NIRC). The net income of the corporation shall be subject to
corporate income tax rate of 35%.
The other items of revenue will not be included in the corporate income tax return. The interest from
money market placements is subject to a final withholding tax of 20%; dividends from Domestic
Corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock
Exchange are subject to transaction tax which is in lieu of the income tax. (BAR 1997)
(iv) Prizes and other winnings
1. Informer’s reward is subject to a final withholding tax of 10%.
SUGGESTED ANSWER:
TRUE. [Sec. 282, NIRC.}
2. Mr. Castro inherited from his father, who died on June 10,1994, several pieces of real property in
Metro Manila. The estate tax return was filed and the estate tax due in the amount of P250,000.00
was paid on December 06, 1994. The Tax Fraud Division of the BIR investigated the case on the
basis of confidential information given by Mr. Santos on January 06, 1998 that the return filed by
Mr. Castro was fraudulent and that he failed to declare all properties left by his father with intent
to evade payment of the correct tax. As a result, a deficiency estate tax assessment for
P1,250,000.00, inclusive of 50% surcharge for fraud, interest and penalty, was issued against him
on January 10, 2001. Mr. Castro protested the assessment on the ground of prescription.
What legal requirement/s must Mr. Santos comply with so that he can claim his reward? Explain.
(3%)
SUGGESTED ANSWER:
The legal requirements that must be complied by Mr. Santos to entitle him to reward are as follows:
1. He should voluntarily file a confidential information under oath with the Law Division of the
Bureau of Internal Revenue alleging therein the specific violations constituting fraud;
2. The information must not yet be in the possession of the Bureau of Internal Revenue, or refer to a
case already pending or previously investigated by the Bureau of Internal Revenue;
3. Mr. Santos should not be a government employee or a relative of a government employee within
the sixth degree of consanguinity; and
4. The information must result to collections of revenues and/or fines and penalties. (Sec. 282, NIRC)
(BAR 2002)

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3. Jose Miranda, a young artist and designer, received a prize of P100.000.00 for winning in the onthe-spot peace poster contest sponsored by a local Lions Club. Shall the reward be included in the
gross income of the recipient for tax purposes? Explain. (3%)
SUGGESTED ANSWER:
No. It is not includable in the gross income of the recipient because the same is subject to a final tax of
20%, the amount thereof being in excess of P10.000 (Sec. 24(B)(1), NIRC of 1997). The prize constitutes a
taxable income because it was made primarily in recognition of artistic achievement which he won due to
an action on his part to enter the contest. [Sec. 32 (B) (7) (c), NIRC of 1997] Since it is an on-the-spot
contest, it is evident that he must have joined the contest in order to earn the prize or award. (BAR 2000)
4. Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council,
a sports association duly accredited by the Philippine Boxing Association. Onyoc received the
amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to
collect income tax on the amount received by Onyoc and donor’s tax from Ayala Land Corporation,
which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.
ANSWER:
The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the
income tax. RA. No. 7549 explicitly provides that “All prizes and awards granted to athletes in local and
International sports tournaments and competitions held in the Philippines or abroad and sanctioned by
their respective national sports associations shall be exempt from income tax".
Neither is the BIR correct in collecting the donor’s tax from Ayala Land Corporation. The law is clear when
it categorically stated “That the donor’s of said prizes and awards shall be exempt from the payment of the
donor’s tax." (BAR 1996)
(2) Passive income not subject to final tax
f. Taxation of capital gains
(1) Income from sale of shares of stock of a Philippine corporation
(i) Shares traded and listed in the stock exchange
1. 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 Philippines 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. (3%)
SUGGESTED ANSWER:
a) No. The gain on the sale or disposition of shares of stock of a domestic corporation held as capital
assets will not be subject to income tax if these shares sold are listed and traded in the stock exchange.
(Section 24(C), NIRC). However, the seller is subject to the percentage tax of 1/2 of 1% of the gross
selling price. (Section 127 (A), NIRC). (BAR 2008)
(ii) Shares not listed and traded in the stock exchange
1. 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 Philippines 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.
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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? Explain. (3%)
SUGGESTED ANSWERS:
b) Yes. The sale of shares of stocks of a domestic corporation held as capital asset, not through a trading
in the local stock exchange, is subject to capital gains tax based on the net capital gain during the
taxable year. The tax rate is 5% for a net capital gain not exceeding P100,000 and 10% for any excess.
(Section 24(C), NIRC). (BAR 2008)
(2) Income from the sale of real property situated in the Philippines
1. Melissa inherited from her father a 300-square-meter lot. At the time of her father’s death on
March 14, 1995, the property was valued at P720,000.00. On February 28, 1996, to defray the cost
of the medical expenses of her sick son, she sold the lot for P600.000.00, on cash basis. The
prevailing market value of the property at the time of the sale was P3.000.00 per square meter.
Is Melissa liable to pay capital gains tax on the transaction? If so, how much and why? If not, why
not? (4%)
SUGGESTED ANSWER:
Yes. The capital gains tax is 6% of the higher value between the selling price (P600,000.00) and fair
market value of the real property (P900,000.00) or a tax in the amount of P54,000.00. The capital gains tax
is due on the sale of a real property classified as a capital asset (Section 24(D)(1), NIRC). (BAR 2009)
2. Josel agreed to sell his condominium unit to Jess for P2. 5 Million. At the time of the sale, the
property had a zonal value of P2.0 Million. Upon the advice of a tax consultant, the parties agreed
to execute two deeds of sale, one indicating the zonal value of P2.0 Million as the selling price and
the other showing the true selling price of P2.5 Million. The tax consultant filed the capital gains
tax return using the deed of sale showing the zonal value of' P2.0 Million as the selling price.
Discuss the tax implications and consequences of the action taken by the parties. (5%)
SUGGESTED ANSWER:
The capital gains tax due on the sale shall be based on the actual selling price of P2.5 million which is
higher than the zonal value of the property. (Section 24(D)(1), NIRC). The documentary stamp tax on the
conveyance of real property shall likewise be based on the higher value. (Sec. 196, NIRC). Accordingly, a
deficiency capital gains tax and documentary stamp tax are due from Josel plus the 50% surcharge
imposable on a fraudulent return.
Both Josel and his tax consultant are criminally liable for tax evasion. Here, it is clear that the three
requisite factors to constitute tax evasion are present, viz: (1) the end to be achieved which is the payment
of less than that known by them to be legally due; (2) an accompanying state of mind which is evil, in bad
faith, willfull or deliberate and not merely accidental; and (3) a course of action which is unlawful. [CIR v.
Estate of Benigno P. Toda, Jr., 438 SCRA 290 (2004)]. (BAR 2005)
3. 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 Php 1 million. 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 Php 800,000 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? (5%)
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SUGGESTED ANSWER:
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. (Section 24(D), NIRC). Actual gain is not required for the imposition of the tax but it is
the gain by fiction of law which is taxable. (BAR 2001)
4. Juan Panalo won a damage suit for P500,000.00 against Juana Talo. Panalo got a writ of execution
and made a levy on the lot of Talo. The lot was sold at public auction where Panalo was the highest
bidder for P500.000.00. Panalo refused to pay any capital gains tax on his purchase of said lot.
Your opinion.
ANSWER:
The capital gains tax from sales of real property is payable by the seller (Section 21 (e) in relation to
Section 49 (a) (4) of the NIRC).
Hence, Panalo cannot refuse to pay the capital gains tax on his purchase of said lot.
ALTERNATIVE ANSWER:
Panalo is not liable for capital gains tax as only the vendor, in this case, Talo, is liable therefor, if at all.
(BAR 1993)
5. 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
month each.
Is his purchase of the three condominium units subject to any tax? Reason briefly.
SUGGESTED ANSWER:
Yes. The purchase will be subject to the capital tax imposed on the sale of real property and the
documentary stamp tax on conveyance of real property, if these units are acquired from individual unit
owners or domestic corporations who hold them as capital assets. (Section 24(D), 27(D)(5) and 196,
NIRC). If these properties, however, were acquired from dealers and/or lessors of real property the
purchase will give rise to the imposition of the regular income tax, value-added tax and documentary
stamp tax. (Section 24-28 and 196, NIRC).
ALTERNATIVE ANSWER:
Yes, the purchase of the three condominium units is subject to the following taxes:
i.
ii.
iii.
iv.

capital gains tax, if held as capital assets by the seller (Section 24(D) and 27(D)(5), NIRC),
otherwise, the regular income tax (Section 24-28, NIRC);
documentary stamp tax (Section 196, NIRC);
local transfer tax (Section 135, LGC); and
value-added tax if acquired from real estate developers or lessors of real property.

ALTERNATIVE ANSWER:
The purchase is only subject to the documentary stamp tax, a tax that is imposed indifferently on the
parties to a transaction (Section 173 and 196, NIRC).
Other taxes that may be due on the transaction, other than the documentary stamp tax, are the legal
liabilities of the seller which cannot be considered as a tax on the purchase but a tax on the sale. To the
purchaser, these taxes are not taxes but merely part of the purchase price if, by the nature of the tax, the
economic incidence can be shifted to him. (BAR 2007)
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(3) Income from the sale, exchange, or other disposition of other capital assets
1. 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 PI.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 PI5 million) x
35% = PI.75 million, without the capital gains tax paid being allowed as tax credit. Manalo
consulted a real estate broker who said that the PI.2 million capital gains tax should be credited
from the PI.75 million deficiency income tax.
a) Is the BIR officer’s tax assessment correct? Explain.
SUGGESTED ANSWER:
The BIR officer’s tax assessment is wrong for two reasons. First, the rate of income tax used is the
corporate income tax although the taxpayer is an Individual. Second, the computation of the gain
recognized from the sale did not consider the holding period of the asset. The capital asset having been
held for more than twelve months, only 50% of the gain is recognized. (Section 39(B), NIRC).
b) If you were hired by Manalo as his tax consultant, what advice would you give him to protect
his interest? Explain. (3%)
SUGGESTED ANSWERS:
I will advise him to ask for the Issuance of the final assessment notice and request for the crediting of the
capital gains tax paid against the income tax due. The taxpayer should explain that the capital gains tax
was paid in good faith because the property sold is a capital asset, and considering that what was paid is
also an income tax it should be credited on grounds of equity against the income tax assessment. Once the
final assessment is made, 1 will advise him to protest it within thirty days from receipt, invoking the
holding period and the wrong rate used. (BAR 2008)
2. A corporation, engaged in real estate development, executed deeds of sale on various subdivided
lots. One buyer, after going around the subdivision, bought a comer lot with a good view of the
surrounding terrain. He paid PI .2 million, and the title to the property was issued. A year later, the
value of the lot appreciated to a market value of PI.6 million, and the buyer decided to build his
house thereon. Upon inspection, however, he discovered that a huge tower antennae had been
erected on the lot frontage totally blocking his view. When he complained, the realty company
exchanged his lot with another comer lot with an equal area but affording a better view.
Is the buyer liable for capital gains tax on the exchange of the lots?
ANSWER:
Yes, the buyer is subject to capital gains tax on the exchange of lots on the basis of prevailing fair market
value of the property transferred at the time of the exchange or the fair market value of the property
received, whichever is higher (Section 21(e), NIRC). Real property transactions subject to capital gains tax
are not limited to sales but also exchanges of property unless exempted by a specific provision of law.
ALTERNATIVE ANSWER:
No. The exchange is not subject to capital gains tax because it is merely done to comply with the intentions
of the parties to the previous contract regarding the sale and acquisition of a property with a good view.
Page | 118

This is a simple substitution of the object of sale and since the previous transaction was already subjected
to tax, no new tax should be imposed on the exchange (BIR Ruling No. 21(e) 053-89 008-95). (BAR 1997)
3. A corporation, engaged in real estate development, executed deeds of sale on various subdivided
lots. One buyer, after going around the subdivision, bought a comer lot with a good view of the
surrounding terrain. He paid PI .2 million, and the title to the property was issued. A year later, the
value of the lot appreciated to a market value of PI.6 million, and the buyer decided to build his
house thereon. Upon inspection, however, he discovered that a huge tower antennae had been
erected on the lot frontage totally blocking his view. When he complained, the realty company
exchanged his lot with another comer lot with an equal area but affording a better view.
Is the buyer liable for capital gains tax on the exchange of the lots?
ANSWER:
Yes, the buyer is subject to capital gains tax on the exchange of lots on the basis of prevailing fair market
value of the property transferred at the time of the exchange or the fair market value of the property
received, whichever is higher (Section 21(e), NIRC). Real property transactions subject to capital gains tax
are not limited to sales but also exchanges of property unless exempted by a specific provision of law.
ALTERNATIVE ANSWER:
No. The exchange is not subject to capital gains tax because it is merely done to comply with the intentions
of the parties to the previous contract regarding the sale and acquisition of a property with a good view.
This is a simple substitution of the object of sale and since the previous transaction was already subjected
to tax, no new tax should be imposed on the exchange (BIR Ruling No. 21(e) 053-89 008-95). (BAR 1997)
4. An individual taxpayer, who owns a ten (10) door apartment with a monthly rental of PI0.000 each
residential unit, sold this property to another individual taxpayer. Is the seller liable to pay the
capital gains tax? (5%)
SUGGESTED ANSWER:
No. The seller is not liable to pay the capital gains tax because the property sold is an ordinary asset, i.e.
real property used in trade or business. It is apparent that the taxpayer is engaged in the real estate
business, regularly renting out the ten (10) door apartment. (BAR 1998)
11. Taxation of non-resident aliens engaged in trade or business

a. General rules
1. Mr. Cortez is a non-resident alien based in Hong Kong. During the calendar year 1999, he came to
the Philippines several times and stayed in the country for an aggregated period of more than 180
days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and
from abroad? (5%)
SUGGESTED ANSWER:
Mr. Cortez being a non-resident alien individual who has stayed for an aggregated period of more than
180 days during the calendar year 1999, shall for that taxable year be deemed to be a non-resident alien
doing business in the Philippines.
Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as an individual
citizen and a resident alien individual, on taxable income received from all sources within the Philippines.
[Sec. 25 (A) (1). NIRC of 1997]

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Thus, he is allowed to avail of the itemized deductions including the personal and additional exemptions
but subject to the rule on reciprocity on the personal exemptions. [Sec. 34 (A) to (J) and (M) in relation to
Sec. 25 (A) (1), Ibid. Sec. 35 (D), Ibid.]
Note:
It is suggested that full credit should be given if the examinee’s answer only cover® the first two
paragraphs. (BAR 2000)
2. Four Catholic parishes hired the services of Frank Binatra, a foreign non-resident entertainer, to
perform for four (4) nights at the Folk Arts Theater. Binatra was paid P200.000.00 a night. The
parishes earned PI,000,000.00 which they used for the support of the orphans in the city. Who are
liable to pay taxes?
ANSWER:
The following are liable to pay Income taxes:
The four catholic parishes because the income received by them, not being income earned “as such” in the
performance of their religious functions and duties, is taxable income under the last paragraph of Sec. 26,
in relation to Sec. 26(e) of the Tax Code. In promoting and operating the Binatra Show, they engaged in an
activity conducted for profit. (Ibid.)
The income of Frank Binatra, a non-resident alien under our law is taxable at the rate of 30%, final
withholding tax based on the gross income from the show. Mr. Binatra is not engaged in any trade or
business in the Philippines. (BAR 1994)
b. Cash and/or property dividends
c. Capital gains
Exclude: non-resident aliens not engaged in trade or business
12. Individual taxpayers exempt from income tax

a. Senior citizens
b. Minimum wage earners
c. Exemptions granted under international agreements
13. Taxation of domestic corporations
a. Tax payable
(1) Regular tax
1. The Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue, issued
a Revenue Regulation using gross Income as the tax base for corporations doing business in the
Philippines. Is the Revenue Regulation valid?
ANSWER:
The regulation establishing gross income as the tax base for corporations doing business in the
Philippines (domestic as well as resident foreign) is not valid. This is no longer implementation of the law
but actually it constitutes legislation because among the powers that are exclusively within the legislative
authority to tax is the power to determine the amount of the tax. (See 1 Cooley 176-184). Certainly, if the
tax is limited to gross income without deductions of these corporations, this is changing the amount of the
tax as said amount ultimately depends on the taxable base. (BAR 1994)
2. ABC, a domestic corporation sold in 1989 two (2) condominiun units of Legaspi Towers in Roxas
Blvd. for P8,158,142.00. Taxpayer corporation declared in its income tax return for taxable year
1989, its gains derived from the sale of the two (2) condominium units as follows:
Page | 120

Proceeds from sale
LESS:
a) AcquisitionCosts
(Deed of Sale 9/9/83)
b) Payments ofRealty Tax
Total (a) (b)
Gains

UNIT A
(316.5 sq.ft.)
P3,933,679 +

UNIT B
(322 sq.ft.)
P4,224,463= P8.158,142

PI,501,295

+

PI,529,755 = P3,031,050

P49.248
PI.550,543
P2.383.136

+
+
+

P55.413 =
P104.661
PI,585,168 = P3,135,711
P2,639,295 =P5.022.431

Without going into computations, answer the following question:
Since ABC derived gains from the sale of the condominium units, should it pay the 5% capital gains
tax, 35% corporate income tax or none of the above because the corporation is not a real estate
dealer? Discuss.
ANSWER:
ABC Corporation must pay the 35% corporate income tax.
The National Internal Revenue Code does not provide for the payment by corporations of 5% capital gains
tax on the sale of real property, whether considered capital assets or not. Such income is included in the
computation of net income (Gross taxable income less deductions) and is subject to the tax rate of 35%.
ALTERNATIVE ANSWER:
The capital gains derived will only form part of the taxable income of the taxpayer susceptible to
deductions. Accordingly, the net capital gain on the sale may not necessarily be subject to the 35% tax.
The taxpayer’s total income and deductions for the year must be considered. It is immaterial whether the
corporation is a real estate dealer or not. (BAR 1992)
(2) Minimum Corporate Income Tax (MCIT)
(i) Imposition of MCIT
1. What is the rationale of the law in imposing what is known as the Minimum Corporate Income tax
on Domestic Corporations? (3%)
SUGGESTED ANSWER:
The imposition of the Minimum Corporate Income Tax (MCIT) is designed to forestall the prevailing
practice of corporations of over claiming deductions in order to reduce their income tax payments. The
filing of income tax returns showing a tax loss every year goes against the business motive which impelled
the stockholders to form the corporation. This is the reason why domestic corporations (and resident
foreign corporations) after the recovery period of four years from the time they commence business
operations, they become liable to the MCIT whenever this tax imposed at 2% of gross income exceeds the
normal corporate Income tax imposed on net income. (Sponsorship Speech, Chairman of Senate Ways and
Means Committee). (BAR 2001)
(ii) Carry forward of excess minimum tax
(iii) Relief from the MCIT under certain conditions
(iv) Corporations exempt from the MCIT
1. Is a corporation which is exempted from the minimum corporate income tax automatically
exempted from the regular corporate income tax? Explain your answer. (2%)
SUGGESTED ANSWER:
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No. The minimum corporate income tax is a proxy for the normal corporate income tax, not the regular
corporate income tax paid by a corporation. For instance, a proprietary educational institution may be
subject to a regular corporate income tax of 10% (depending on its dominant income), but it is exempt
from the imposition of MCIT because the latter is not intended to substitute special tax rates. So is with
PEZA enterprises, CDA enterprises etc.
Note:
If what is meant by regular income tax is the 32% tax rate imposed on taxable income of corporations, the
answer would be in the affirmative, because domestic corporations and resident foreign corporations are
either liable for the 2% of gross income (MCIT) or 32% of net income (the normal corporate income tax)
whichever is higher.
ALTERNATIVE ANSWER:
No. A corporation which is exempted from the minimum corporate income tax is not automatically
exempted from the regular corporate income tax. The reason for this is that MCIT is imposed only
beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations. Thus, a corporation may be exempt from MCIT because it is only on
its third year of operations following its commencement of business operations. (BAR 2001)
(v) Applicability of the MCIT where a corporation is governed both under the regular
tax system and a special income tax system
b. Allowable deductions
1. Distinguish Allowable Deductions from Personal Exemptions. Give an example of an allowable
deduction and another example for personal exemption. (5%)
SUGGESTED ANSWER:
The distinction between allowable deductions and personal exemptions are as follows:
1. As to amount — Allowable deductions generally refer to actual expenses incurred in the pursuit of
trade, business or practice of profession while personal exemptions are arbitrary amounts allowed
by law.
2. As to nature — Allowable deductions constitute business expenses while personal exemptions
pertain to personal expenses.
3. As to purpose — Deductions are allowed to enable the taxpayer to recoup his cost of doing
business while personal exemptions are allowed to cover personal, family and living expenses.
4. As to claimants — Allowable deductions can be claimed by all taxpayers, corporate or otherwise,
while personal exemptions can be claimed only by individual taxpayers. (BAR 2001)
(i) Itemized deductions
(ii) Optional standard deduction
1. A corporation can claim the optional standard deduction equivalent to 40% of its gross sales or
receipts, as the case may be.
SUGGESTED ANSWER:
FALSE [Sec. 34(L), NIRC, as amended by RA No. 9504.]
2. 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
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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? (4%)
SUGGESTED ANSWER:
No. Since Ernesto has elected to claim the optional standard deduction, said election is irrevocable for the
taxable year for which the return is made (Section 34(L), NIRC). (BAR 2009)
c. Taxation of passive income
(i) Passive income subject to tax
a) Interest from deposits and yield, or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements and
royalties
1. During the year, a domestic corporation derived the following items of revenue: (a) gross receipts
from a trading business: (b) interests from money placements in the banks; (c) dividends from its
stock investments in domestic corporations; (d) gains from stock transactions through the
Philippine Stock Exchange; (e) proceeds under an insurance policy on the loss of goods.
In preparing the corporate income tax return, what should be the tax treatment on each of the
above items?
ANSWER:
The gross receipts from trading business is includible as an item of income in the corporate income tax
return and subject to corporate income tax rate based on net income. The other items of revenue will not
be included in the corporate income tax return. The interest from money market placements is subject to a
final withholding tax of 20%; dividends from Domestic Corporation are exempt from income tax; and
gains from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in
lieu of the income tax. The proceeds under an insurance policy on the loss of goods is not an item of
income but merely a return of capital hence not taxable.
ALTERNATIVE ANSWER:
The gross receipts from trading business are includible as an item of income in the corporate income tax
return. Likewise, the gain or loss realized as a consequence of the receipt of proceeds under an insurance
policy on the loss of goods will be included in the corporate income tax return either as a taxable gain or a
deductible loss. The gain or loss is arrived at by deducting from the proceeds of insurance (amount
realized) the basis of the good lost (Sec. 34(a). NIRC). The net income of the corporation shall be subject to
corporate income tax rate of 35%.
The other items of revenue will not be included in the corporate income tax return. The interest from
money market placements is subject to a final withholding tax of 20%; dividends from Domestic
Corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock
Exchange are subject to transaction tax which is in lieu of the income tax. (BAR 1997)
b) Capital gains from the sale of shares of stock not traded in the stock
exchange
c) Income derived under the expanded foreign currency deposit system
d) Inter-corporate dividends
1. State with reasons the tax treatment of the following in the preparation of annual- income tax
returns:
Dividends received by a domestic corporation from another domestic corporation;
SUGGESTED ANSWER:
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Dividends received by a domestic corporation from another domestic corporation are not subject to
income tax hence should not be declared in the income tax return. (Sec. 27 (D)(4), NIRC). (BAR 2005)
2. During the year, a domestic corporation derived the following items of revenue: (a) gross receipts
from a trading business: (b) interests from money placements in the banks; (c) dividends from its
stock investments in domestic corporations; (d) gains from stock transactions through the
Philippine Stock Exchange; (e) proceeds under an insurance policy on the loss of goods.
In preparing the corporate income tax return, what should be the tax treatment on each of the
above items?
ANSWER:
The gross receipts from trading business is includible as an item of income in the corporate income tax
return and subject to corporate income tax rate based on net income. The other items of revenue will not
be included in the corporate income tax return. The interest from money market placements is subject to a
final withholding tax of 20%; dividends from domestic corporation are exempt from income tax; and gains
from stock transactions with the Philippine Stock Exchange are subject to transaction tax which is in lieu
of the income tax. The proceeds under an insurance policy on the loss of goods is not an item of income
but merely a return of capital hence not taxable.
ALTERNATIVE ANSWER:
The gross receipts from trading business are includible as an item of income in the corporate income tax
return. Likewise, the gain or loss realized as a consequence of the receipt of proceeds under an insurance
policy on the loss of goods will be included in the corporate income tax return either as a taxable gain or a
deductible loss. The gain or loss is arrived at by deducting from the proceeds of insurance (amount
realized) the basis of the good lost (Sec. 34(a). NIRC). The net income of the corporation shall be subject to
corporate income tax rate of 35%.
The other items of revenue will not be included in the corporate income tax return. The interest from
money market placements is subject to a final withholding tax of 20%; dividends from Domestic
Corporation are exempt from income tax; and gains from stock transactions with the Philippine Stock
Exchange are subject to transaction tax which is in lieu of the income tax. (BAR 1997)
e) Capital gains realized from the sale, exchange, or disposition of lands
and/or buildings
1. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for PI00,000.
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.
b) Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax base
and rate? Explain. (3%)
SUGGESTED ANSWER:
b) Yes. The tax base in a taxable disposition of a real property classified as a capital asset is the higher
between two values: the fair market value of the property received in exchange and the fair market
value of the property exchanged. Since the fair market value of two properties are the same, the said
fair market value should be taken as the tax base which is P10 million. The income tax rate is 6%.
(Section 24(D) (1), NIRC). (BAR 2008)
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2. An individual taxpayer who owns a ten (10) door apartment with a monthly rental of PI0.000 each
residential unit, sold this property to another individual taxpayer. Is the seller liable to pay the
capital gains tax? (5%)
SUGGESTED ANSWER:
No. The seller is not liable to pay the capital gains tax because the property sold is an ordinary asset, i.e.
real property used in trade or business. It is apparent that the taxpayer is engaged in the real estate
business, regularly renting out the ten (10) door apartment. (BAR 1998)

(ii) Passive income not subject to tax
d. Taxation of capital gains
(i) Income from sale of shares of stock
(ii) Income from the sale of real property situated in the Philippines
1. ABC Corporation sold a real property in Malolos, Bulacan to XYZ Corporation. The property has
been classified as residential and with a zonal valuation of PI,000 per square meter. The capital
gains tax was paid based on the zonal value. The Revenue District Officer (RDO), however, refused
to issue the Certificate Authorizing Registration for the reason that based on his ocular inspection
the property should have a higher zonal valuation determined by the Commissioner of Internal
Revenue because the area is already a commercial area. Accordingly, the RDO wanted to make a
recomputation of the taxes due by using the fair market value appearing in a nearby bank’s
valuation list which is practically double the existing zonal value. The RDO also wanted to assess a
donor’s tax on the difference between the selling price based on the zonal value and the fair
market value appearing in a nearby bank’s valuation list.
Does the RDO have the authority or discretion to unilaterally use the fair market value as the basis
for determining the capital gains tax and not the zonal value as determined by the Commissioner
of Internal Revenue? Reason briefly.
SUGGESTED ANSWER:
No. The RDO has no authority to use a fair market value other than that prescribed in the Tax Code. The
fair market value prescribed for the computation of any internal revenue tax shall be, whichever is the
higher of: (1) the fair market value as determined by the Commissioner (referred to as zonal value); or (2)
the fair market value as shown in the schedule of values of the provincial and city assessors (FMV per tax
declaration). (Section 6(B), NIRC). The use of the fair market value appearing in a nearby bank’s valuation
list, therefor, is not allowed for purposes of computing internal revenue taxes. (BAR 2007)
2. In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for PI00,000.
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.
b) Is Juan Gonzales subject to income tax on the exchange of property? If so, what is the tax base
and rate? Explain. (3%)
SUGGESTED ANSWER:
b) Yes. The tax base in a taxable disposition of a real property classified as a capital asset is the higher
between two values: the fair market value of the property received in exchange and the fair market
value of the property exchanged. Since the fair market value of two properties are the same, the said
Page | 125

fair market value should be taken as the tax base which is P10 million. The income tax rate is 6%.
(Section 24(D) (1), NIRC). (BAR 2008)
(iii) Income from the sale, exchange, or other disposition of other capital assets
(iv) Tax on proprietary educational institutions and hospitals
1. XYZ Colleges is an educational institution run by the Archdiocese of BP City. It collected and
received the following:
(a) Tuition fees
(b) Dormitory fees
(c) Rentals from canteen concessionaires
(d) Interest from money-market
(e) Donation of a lot and building by school alumni
Suppose that XYZ Colleges is a proprietary educational institution owned by the Archbishop’s
family, rather than the Archdiocese, which of those above cited income and donation would be
exempt from taxation? Explain briefly. (5%)
SUGGESTED ANSWER:
If XYZ Colleges is a proprietary educational institution, all of its income from school related and nonschool related activities will be subject to the income tax based on its aggregate net income derived from
both activities (Section 27(B)). Accordingly, all of the income enumerated in the problem will be taxable.
The donation of lot and building will likewise be subject to the donor’s tax because a donation to an
educational institution is exempt only if the school is incorporated as a non-stock entity paying no
dividends.
Since the donee is a proprietary educational institution, the donation is taxable (Section 101(A)(3), NIRC)
(BAR 2004)
e. Tax on government-owned or controlled corporations, agencies or instrumentalities
14. Taxation of resident foreign corporations
a. General rule
b. With respect to their income from sources within the Philippines
c. Minimum Corporate Income Tax
d. Tax on certain income
(1) Interest from deposits and yield, or any other monetary benefit from deposit substitutes,
trust funds and similar arrangements and royalties
(2) Income derived under the expanded foreign currency deposit system
(3) Capital gains from sale of shares of stock not traded in the stock exchange
(4) Inter-corporate dividends
Exclude:
(i) International carrier
1. An international airline with no landing rights in the Philippines sold tickets in the Philippines for
air transportation. Is income derived from such sales of tickets considered taxable income of the
said international air carrier from Philippine sources under the Tax Code? Explain. (5%)
SUGGESTED ANSWER:
No. While the tickets are sold here by the international airline, this is for carriage of persons, excess
baggage, cargo and mail not originating from the Philippines because the airline has no landing rights in
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the Philippines. The income from the sale of tickets is actually the gross revenue derived from the carriage
of persons, excess baggage, cargo and mail and these revenues are considered as income from Philippine
sources only if the flight originates from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of payment of the ticket or passage document. (Sec. 28(A)(3)(a), NIRC).
Accordingly, the income mentioned is not derived from Philippine sources. (BAR 2005)
(ii) Offshore banking units
(iii) Branch profits remittances
(iv) Regional or area headquarters and regional operating headquarters of multinational
companies
15. Taxation of non-resident foreign corporations

a. General rule
b. Tax on certain income
(1) Interest on foreign loans
(2) Inter-corporate dividends
(3) Capital gains from sale of shares of stock not traded in the stock exchange

Exclude:
(i) Non-resident cinematographic film-owner, lessor or distributor
(ii) Non-resident owner or lessor of vessels chartered by Philippine national
(iii) Non-resident owner or lessor of aircraft machineries and other equipment
16. Improperly accumulated earnings of corporations

1. What is the “immediacy test”? Explain briefly. (2%)
SUGGESTED ANSWER:
The “immediacy test” is applied to determine whether the accumulation of the 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, 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, GR No. L-26145, Feb. 20, 1984).
2. The capitalization rules may be resorted to by the BIR in order to compel corporate taxpayers to
declare dividends to their stockholders regularly.
SUGGESTED ANSWER:
TRUE. [Sec. 244, NIRC; Rev. Reg. No. 2-2001 implementing Sec. 29, NIRC.]
17.
18.
19.
20.

Exemption from tax on corporations
Taxation of partnerships
Taxation of general professional partnerships
Withholding tax
a. Concept
b. Kinds
(1) Withholding of final tax on certain incomes

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1. What do you think is the reason why cash dividends, when received by a resident citizen or alien
from a domestic corporation, are taxed only at the final tax of 10% and not at the progressive tax
rate schedule under Section 24(A) of the Tax Code? Explain your answer. (5%)
SUGGESTED ANSWER:
The reason for imposing final withholding tax rather than the progressive tax schedule on cash dividends
received by a resident citizen or alien from a domestic corporation is to ensure the collection of income
tax on said income. If we subject the dividend to the progressive tax rate, which can only be done through
the filing of income tax returns, there is no assurance that the taxpayer will declare the income, especially
when there are other items of gross income earned during the year. It would be extremely difficult for the
BIR to monitor compliance considering the huge number of stockholders. By shifting the responsibility to
remit the tax to the corporation, it is very easy to check compliance because there are fewer withholding
agents compared to the number of income recipients.
Likewise, the imposition of a final withholding tax will make the tax available to the government at an
earlier time. Finally, the final withholding tax will be a sure revenue to the government unlike when the
dividend is treated as a returnable income where the recipient thereof who is in a tax loss position is given
the chance to offset such loss against dividend income thereby depriving the government of the tax on said
dividend income.
Note:
It is recommended that any of the foregoing answers can be given full credit because the question involves
a policy issue which can only be found in the deliberations of Congress.
ALTERNATIVE ANSWER:
The reason why cash dividends received by a resident citizen or alien from a domestic corporation are
subjected to the final withholding tax of 10% and not at the progressive rate tax schedule is to lessen the
impact of a second layer of tax on the same income. (BAR 2001)
(2) Withholding of creditable tax at source
1. HK Co. is a Hong Kong corporation not doing business in the Philippines. It holds 40% of the shares
of A Co., a Philippine company, while the 60% is owned by P Co., a Filipino-owned Philippine
corporation. HK Co. also owns 100% of the shares of B Co., an Indonesian company which has a
duly licensed Philippine branch. Due to worldwide restructuring of the HK Co. group, HK Co.
decided to sell all its shares in A and B Cos. The negotiations for the buy-out and the signing of the
Agreement of Sale were all done in the Philippines. The Agreement provides that the purchase
price will be paid to HK Co's bank account in the U.S. and that little to A and B Cos Shares will pass
from HK Co. to P Co. in HK where the stock certificates will be delivered. P Co. seeks your advice as
to whether or not it will subject the payments of purchase price to WT. Explain your advice. (10%)
SUGGESTED ANSWER:
P Co. should not subject the payments of the purchase price to withholding tax. While the seller is a
nonresident foreign corporation which is not normally required to file returns in the Philippines,
therefore, ordinarily all its income earned from Philippine sources is taxed via the withholding tax system,
this is not the procedure availing with respect to sales of shares of stock. The capital gains tax on the sale
of shares of stock of a domestic corporation is always required to be paid through capital gains tax return
filed. The sale of the shares of stock of the Indonesian Corporation is not subject to income tax under our
jurisdiction because the income derived therefrom is considered as a foreign- sourced income.
ALTERNATIVE ANSWER:
Yes, but only on the shares of stocks of A Co. and only on the portion of the purchase price, which
constitutes capital gains. Under the Tax Code of 1997, the capital gains tax imposed under Section
28(B)(5)(c) is collectible via the withholding of tax at source pursuant to Section 57 of the same Code.
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Note:
The bar candidate might have relied on the provision of the Tax Code of1997 which provides that the
capital gains tax is imposed as withholding taxes (Section 57, NIRC). This procedure is impractical and,
therefore, not followed in practice because the buyer/ withholding agent will not be in a position to
determine how much income is realized by the seller from the sale.
For this reason, any of the foregoing suggested answers should be given full credit. (BAR 1999)
2. HK Co., is a Hong Kong company, which has a duly licensed Philippine branch, engaged in trading
activities in the Philippines. HK Co. also invested directly in 40% of the shares of stock of A Co., a
Philippine corporation. These shares are booked in the Head Office of HK Co. and are not reflected
as assets of the Philippine branch. In 1998, A Co. declared dividends to its stockholders. Before
remitting the dividends to HK Co., A Co. seeks your advice as to whether it will subject the
remittance to WT. No need to discuss WT rates, if applicable. Focus your discussion on what is the
issue. (10%)
SUGGESTED ANSWER:
I will advise A Co. to withhold and remit the withholding tax on the dividends. While the general rule is
that a foreign corporation is the same juridical entity as its branch office in the Philippines, when,
however, the corporation transacts business in the Philippines directly and independently of its branch,
the taxpayer would be the foreign corporation itself and subject to the dividend tax similarly imposed on
non-resident foreign corporation. The dividends attributable to the Home Office would not qualify as
dividends earned by a resident foreign corporation, which is exempt from tax. (Marubeni Corporation v.
Commissioner, GR No. 76573, September 14, 1989). (BAR 1999)
3. Bates Advertising Company is a non-resident corporation duly organized and existing under the
laws of Singapore. It is not doing business and has no office in the Philippines. Pilipinas Garment
Incorporated, a domestic corporation, retained the services of Bates to do all the advertising of its
products abroad. For said services. Bates’ fees are paid through outward remittances. Are the fees
received by Bates subject to any withholding tax?
ANSWER:
The fees paid to Bates Advertising Co..a non-resident foreign corporation are not subject to withholding
tax since they are not subject to Philippine tax. They are exempt because they do not constitute income
from Philippine sources, the same being compensation for labor or personal services performed outside
the Philippines (Sec. 36(c) (3) and Sec. 25(b)(1), Tax Code). (BAR 1994)
c. Withholding of VAT
d. Filing of return and payment of taxes withheld
(1) Return and payment in case of government employees
(2) Statements and returns
1. 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. (2%)
[a] Raffy will declare as his income the salaries of both spouses, while Wena will declare he income
from the coffee shop.
[b] Wena wil declare the combined compensation income of he spouses, and Raffy will declare the
income from the coffee shop.
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[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.
SUGGESTED ANSWER:
[d] Raffy will declare his own compensation and Wena will declare hers. The income from the coffee shop
shall be equally divided between them. Bach spouse shall be taxed separately on their corresponding
taxable income to be covered by one consolidated return for the spouses. (BAR 2009)
2. How often does a domestic corporation file income tax return for income earned during a single
taxable year? Explain the process. (3%)
What is the reason for such procedure? (2%)
SUGGESTED ANSWER:
A domestic corporation is required to file income tax returns four (4) times for income earned during a
single taxable year. Quarterly returns are required to be filed for the first three quarters where the
corporation shall declare its quarterly summary of gross income and deductions on a cumulative basis.
(Section 75, NIRC). Then, a final adjustment return is required to be filed covering the total taxable income
for the entire year, calendar or fiscal. (Section 76, NIRC).
The reason for this procedure is to ensure the timeliness of collection to meet the budgetary needs of the
government. Likewise, it is designed to ease the burden on the taxpayer by providing it with an
installment payment scheme, rather than requiring the payment of the tax on a lump-sum basis after the
end of the year.
ALTERNATIVE ANSWER:
The reason for the quarterly filing of tax returns is to allow partial collection of the tax before the end of
the taxable year and also to improve the liquidity of government. (BAR 2001)
3. In the year 2000, X worked part time as a waitress in a restaurant in Mega Mall from 8:00 a.m. to
4:00 p.m. and then as a cashier in a 24-hour convenience store in her neighborhood. The total
income of X for the year from the two employers does not exceed her total personal and additional
exemptions for the year 2000. Was she required to file an income tax return last April? Explain
your answer. (5%)
SUGGESTED ANSWER:
Yes. An individual deriving compensation concurrently from two or more employers at any time during
the taxable year shall file an income tax return (Sec. 51(A)(2)(b), NIRC.)
ALTERNATIVE ANSWER:
It depends. An individual with pure compensation income is not required to file an income tax returns
when she meets the following conditions; (1) the total gross compensation income does not exceed
Php60,000, and (2) the income tax has been correctly withheld, meaning the tax withheld is equal to the
tax due. (Section 51(A)(2)(b), NIRC).
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There is no mention in the problem of the amount of personal and additional personal exemption to
quantify how much is that compensation income that did not exceed the personal and additional personal
exemptions. There is no, mention, either, of whether or not the employers withheld taxes and that the
amount withheld is equal to the tax due. Whether or not she will be required to file an income tax return
last April 15 on the 2000 income will depend on her compliance with the requirements of the law. (BAR
2001)
4. Is a non-resident alien who is not engaged in trade or business or in the exercise of profession in
the Philippines but who derived rental income from the Philippines required to file an income tax
return on April of the year following his receipt of said income? If not, why not? Explain your
answer. (5%)
SUGGESTED ANSWER:
No. The income tax on all income derived from Philippine sources by a non-resident alien who is not
engaged in trade or business in the Philippines is withheld by the lessee as a Final Withholding Tax.
(Section 57(A), NIRC). The government cannot require persons outside of its territorial jurisdiction to file
a return; for this reason, the income tax on income derived from within must be collected through the
withholding tax system and thus relieve the recipient of the income the duty to file income tax returns.
(Section 51, NIRC). (BAR 2001)
5. A bachelor was employed by Corporation A on the first working day of January 1996 on a part-time
basis with a salary of P3.500.00 a month. He then received the 13th month pay. In September 1996,
he accepted another part-time job from Corporation B from which he received a total
compensation of P14,500.00 for the year 1996. The correct total taxes were withheld from both
earnings.
With the withholding taxes already paid, would he still be required to file an income tax return for
his 1996 income?
ANSWER:
Yes, because what is exempt from filing are those individuals who have total compensation income not
exceeding P60.000 with the taxes correctly withheld only by one employer. In this case, even if his
aggregate compensation income from both his employers does not exceed P60.000 and that total
withholding taxes were correctly withheld by his employers, the fact that he derives compensation income
concurrently from two employers at anytime during the taxable year, does not exempt him from filing his
income tax return (RA 7497. as implemented by RR No. 4-93). (BAR 1997)
6. Robert Patterson is an American who first arrived in the Philippines in 1944 as a member of the
U.S. Armed Forces that liberated the Philippines. After the war, he returned to the United States
but came back to the Philippines in 1958 and stayed here up to the present He is presently
employed in the United States Naval Base. Olongapo City. For the year 1985, he earned
US$10,856.00. Sometime in 1986, the District Revenue Office of the Bureau of Internal Revenue
served him a notice informing him that he did not file his income tax return for the year 1985 and
directing him to file said return in 10 days. He refused to file any return claiming that he is not a
resident alien and is therefore not required to file any income tax return.
Is Patterson’s claim correct?
ANSWER:
Patterson’s claim is not correct. While Paterson is exempt from income tax, an exemption from income tax
does not, however, necessarily mean an exemption likewise from the filing of an income tax return
{Garrison vs. Court of Appeals, 187 SCRA 525). (BAR 1991)
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7. 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.
SUGGESTED ANSWER:
TRUE. [Sec. 56(A)(2), NIRC.]
e. Final withholding tax at source
f. Creditable withholding tax
(1) Expanded withholding tax
(2) Withholding tax on compensation
1. X owns a half-hectare property In Bacoor, Cavite which in 1980 was expropriated by the national
government, through the Department of Public Works and Highways. After ten years, X was paid
P2.000.000.00 as just compensation plus 6% annual interest by the DPWH but minus the
withholding tax. Is the action of DPWH proper? Reasons.
ANSWER:
No, the action of DPWH is not proper.
In the case of Province of Tayabas vs. Perez, 66 Phil. 467. Just compensation was defined as “the just and
complete equivalent of the loss which the owner of a thing expropriated has to suffer by reason of the
expropriation".
Further, in BIR Ruling 61-91 just compensation was defined as that which is paid by the Government
equivalent to the value of the property at the time of its taking. It is the fair and full equivalent for the
indemnity.
Based in the foregoing it is clear therefore that the amount received after 10 years as just compensation is
not in any way a profit, gain or income on the part of X In the same vein, the 6% annual interest paid by
DPWH is not income. The same partakes of the nature of a penalty or indemnity due and accruing to X for
having been deprived of the use and benefit by not being paid of the fair market value of the property
since its taking 10 years ago. Hence, the DPWH should not have withheld taxes.
ALTERNATIVE ANSWERS:
a) No. the withholding tax (presumably on capital gains) should have been based on the fair market
value of the property at the time of the expropriation. Thus, in this case, for purposes of computing the
withholding tax on capital gains, the amount representing the 6% annual interest should have been
excluded from the withholding tax base.
b) No. With respect to capital gains on sales of realty to the government, X may elect to include the same
in his gross compensation income or to pay the corresponding capital gains tax. By withholding the
taxes on the just compensation (for which the basis should only be P2,000,000.00) excluding the
interest) DPWH denied such option to X.
c) Assuming the property is an ordinary asset, the expropriation proceedings in 1980 is not subject to
the creditable withholding tax under Revenue Memorandum Circular 7-90 clarifying Revenue
Regulations Nos. 12-89 and 1 -90 implementing Section 50 (b) of the NIRC, the transfer of the
property was effected in 1980. The above mentioned revenue rules and regulations are applicable
only to sales, exchange or transfers of real properties consummated on or after 1 January 1990 (BIR
Ruling 040-91). The 6% interest on the “just compensation" is not in the nature of an interest on
Philippine currency bank deposit and yield or any other monetary benefit from deposit substitutes
from trust fund and similar arrangements, the same is not subject to the 20% final withholding tax
under Sec. 21 of the NIRC (BIR Ruling 040-91). (BAR 1993)
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g. Timing of withholding
B. Estate tax
1. Basic principles
1. Is the approval of the court, sitting as probate or estate settlement court, required in the
enforcement and collection of estate tax? Explain. (10%)
SUGGESTED ANSWER:
No. The approval of the court, sitting in probate, is not a mandatory requirement in the collection of estate
tax. On the contrary, under Section 94 of the NIRC, it is the probate or settlement court which is forbidden
to authorize the executor or judicial administrator of the decedent’s estate, to deliver any distributive
share to any party interested in the estate, unless a certification from the Commissioner of Internal
Revenue that the estate tax has been paid is shown. [Marcos U v. Court of Appeals, 273 SCRA 47 (1997)].
(BAR 2005)
2. VCC is the administrator of the estate of his father NGC, in the estate proceedings pending before
the MM Regional Trial Court. Last year, he received from the Commissioner of Internal Revenue a
deficiency tax assessment for the estate in the amount of PI, 000,000. But he ignored the notice.
Last month, the BIR affected a levy on the real properties of the estate to pay the delinquent tax.
VCC filed a motion with the probate court to stop the enforcement and collection of the tax on the
ground that the BIR should have secured first the approval of the probate court, which had
jurisdiction over the estate, before levying on its real properties. Is VCC’s contention correct? (5%)
SUGGESTED ANSWER:
No. VCC’s contention is not correct. The approval of the probate court is not necessary. Payment of estate
taxes is a condition precedent for the distribution of the properties of the decedent and the collection of
estate taxes is executive in nature for which the court is devoid of any jurisdiction. Hence, the approval of
the court, sitting in probate, or as a settlement tribunal is not a mandatory requirement in the collection of
estate taxes (Marcos H v. Court of Appeals, 273 SCRA 47 [1997]). (BAR 2004)
2.
3.
4.
5.

Definition
Nature
Purpose or object
Time and transfer of properties

1. A, aged 90 years and suffering from incurable cancer, on August 1, 2001 wrote a will and, on the
same day, made several inter-vivos gifts to his children. Ten days later, he died. In your opinion,
are the inter-vivos gifts considered transfers in contemplation of death for purposes of
determining properties to be included in his gross estate? Explain your answer. (5%)
SUGGESTED ANSWER:
Yes. When the donor makes his will within a short time of, or simultaneously with, the making of gifts, the
gifts are considered as having been made in contemplation of death. (Roces v. Posadas, 58 Phil. 108).
Obviously, the intention of the donor in making the inter-vivos gifts is to avoid the imposition of the estate
tax and since the donees are likewise his forced heirs who are called upon to inherit, it will create a
presumption juris tantum that said donations were made mortis causa, hence, the properties donated
shall be included as part of A's gross estate. (BAR 2001)
2. Are donations inter vivos and donations mortis causa subject to estate taxes?
ANSWER:
Donations inter vivos are subject to donor’s gift tax (Sec. 91 (a). Tax Code) while donations mortis causa
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are subject to estate tax (Sec. 77, Tax Code). However, donations inter vivos, actually constituting taxable
lifetime like transfers in contemplation of death or revocable transfers (Sec. 78 (b) and (c). Tax Code) may
be taxed for estate tax purposes, the theory being that the transferor’s control thereon extends up to the
time of his death.
ALTERNATIVE ANSWER:
Donations inter vivos are not subject to estate taxes because the transfer of the property takes effect
during the lifetime of the donor. The transfer is therefore subject to the donor’s tax.
On the other hand, donations mortis causa are subject to estate taxes since the transfer of the properties
takes effect after the death of the decedent. Such donated properties, real or personal, tangible or
intangible, shall form part of the gross estate. (BAR 1994)
6.
7.
8.

Classification of decedent
Gross estate vis-à-vis net estate
Determination of gross estate and net estate

1. Jose Ceman, Filipino citizen, married to Maria Ceman, died in a vehicular accident in NLEX on July
10, 2007. The spouses owned, among others, a 100-hectare agricultural land in Sta. Rosa, Laguna
with current fair market value of P20 million, which was the subject matter of a Joint Venture
Agreement about to be implemented with Star Land Corporation (SLC), a well-known real estate
development company. He bought the said real property for P2 million fifty years ago. On January
5, 2008, the administrator of the estate and SLC jointly announced their big plans to start
conversion and development of the agricultural lands in Sta. Rosa, Laguna, into first-class
residential and commercial centers. As a result, the prices of real properties in the locality have
doubled.
The Administrator of the Estate of Jose Ceman filed the estate tax return on January 9,2008, by
including in the gross estate the real property at P2 million. After 9 months, the BIR issued
deficiency estate tax assessment, by valuing the real property at P40 million.
a) Is the BIR correct in valuing the real property at P40 million? Explain. (3%)
SUGGESTED ANSWER:
No. The value of the property for estate tax purposes shall be the fair market value thereof at the time of
death. (Section 88(B), NIRC).
b) If you disagree, what is the correct value to use for estate tax purposes? Explain. (3%)
SUGGESTED ANSWER:
The correct value to use for estate tax purposes is P20 million which is the current fair market value of the
property at the time of the decedent's death. (Section 88(B), NIRC). (BAR 2008)
2. Antonia Santos, 30 years old, gainfully employed, is the sister of Eduardo 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 agree to a 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.
SUGGESTED ANSWER:
No. The estate tax is a tax on the privilege enjoyed by an individual in controlling the disposition of her
properties to take effect upon her death. The PIOM is not a property existing as of the time of decedent’s
death; hence, it cannot be said that she exercised control over its disposition. Since the privilege to
transmit the property is not exercised by the decedent, the estate tax cannot be imposed thereon.
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(Definition of Estate Tax p. 184, Vitug, Compendium of Tax Law and Jurisprudence, Third Revised Edition).
(BAR 2007)
3. Remedios, a resident citizen, died on November 10, 2006. She died leaving three condominium
units in Quezon City valued at P5 Million each. Rodolfo was her only heir. He reported her death on
December 5, 2006 and filed the estate tax return on March 30,2007. Because he needed to sell one
unit of the condominium to pay for the estate tax, he asked the Commissioner of Internal Revenue
to give him one year to pay the estate tax due. The Commissioner approved the request for
extension of time provided that the estate tax be computed on the basis of the value of the property
at the time of payment of the tax.
Does the condition that the basis of the estate tax will be the value at the time of the payment have
legal basis? Reason briefly.
SUGGESTED ANSWER:
No. The valuation of properties comprising the estate of a decedent is the fair market as of the time of
death. No other valuation date is allowed by law. (Section 88, NIRC). (BAR 2007)
4. Ralph Donald, an American citizen, was a top executive of a U.S. company in the Philippines until he
retired in 1999. He came to like the Philippines so much that following his retirement, he decided
to spend the rest of his life in the country. He applied for and was granted a permanent resident
status the following year. In the spring of 2004, while vacationing in Orlando, Florida, USA, he
suffered a heart attack and died. At the time of his death, he left the following properties:
(a) bank deposits with Citibank Makati and Citibank Orlando. Florida: (b) a resthouse in Orlando,
Florida; (c)a condominium unit in Makati: (d) shares of stock in the Philippine subsidiary of the
U.S. Company where he worked: (e) shares of stock in San Miguel Corp. and PLDT; (f) shares of
stock in Disney World in Florida: (g) U.S. treasury bonds; and (g) proceeds from a life insurance
policy issued by a U.S. corporation.
Which of the foregoing assets shall be included in the taxable gross estate in the Philippines?
Explain. (5%)
SUGGESTED ANSWER:
Being a resident of the Philippines at the time of his death, the gross estate of Ralph Donald shall include
all his property, real or personal, tangible or intangible, wherever situated at the time of his death.
(Section 85, NIRC). Thus, the following shall be included in his taxable gross estate in the Philippines: .
a)
b)
c)
d)
e)
f)
g)

bank deposits with Citibank Makati and Citibank Orlando, Florida:
a resthouse in Orlando, Florida;
a condominium unit in Makati;
shares of stock in the Philippine subsidiary of the U.S. company where he worked;
shares in San Miguel Corp. and PLDT;
shares of stock in Disney World in Florida; and
U.S treasury bonds

The proceeds from a life insurance policy issued by a U.S. corporation is included as part of the gross
estate of Ralph Donald, if the designation of the beneficiary is revocable or irrespective of the nature of
designation, if the designated beneficiary is either the estate, the executor or administrator. If the
designated beneficiary is other than the estate, executor or administrator and the designation is
irrevocable, the proceeds shall not form part of his gross estate. (Section 85 (E), NIRC). (BAR 2005)
5. Discuss the rule on situs of taxation with respect to the imposition of the estate tax on property left
behind by a non-resident decedent. (2%)
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SUGGESTED ANSWER:
The value of the gross estate of a non-resident decedent who is a Filipino citizen at the time of his death
shall be determined by including the value at the time of his death of all property, real or personal,
tangible or intangible, wherever situated to the extent of the interest therein of the decedent at the time of
his death [Sec. 85 (A). NIRC of 1997]. These properties shall have a situs of taxation in the Philippines
hence subject to Philippine estate taxes.
On the other hand, in the case of a non-resident decedent who at the time of his death was not a citizen of
the Philippines, only that part of the entire gross estate which is situated in the Philippines to the extent of
the interest therein of the decedent at the time of his death shall be included in his taxable estate.
Provided, that, with respect to intangible personal property, we apply the rule of reciprocity. (Ibid) (BAR
2000)
6. Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack while on a business
trip to the USA. He died intestate on June 15. 2000 in New York City, leaving behind real properties
situated in New York; his family home in Valle Verde, Pasig City; an office condominium in Makati
City; shares of stocks in San Miguel Corporation; cash in bank; and personal belongings. The
decedent is heavily insured with Insular Life. He had no known debts at the time of his death. As
the sole heir and appointed Administrator, how would you determine the gross estate of the
decedent? (3%)
SUGGESTED ANSWER:
The gross estate shall be determined by including the value at the time of his death all of the properties
mentioned, to the extent of the Interest he had at the time of his death because he is a Filipino citizen. (Sec.
85 (A), NIRC of 1997]
With respect to the life insurance proceeds, the amount includible in the gross estate for Philippine tax
purposes would be to the extent of the amount receivable by the estate of the deceased, his executor, or
administrator, under policies taken out by decedent upon his own life, irrespective of whether or not the
insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary
designated in the policy of insurance, except when it is expressly stipulated that the designation of the
beneficiary is irrevocable. [Sec. 85 (Ej, NIRC of 1997] (BAR 2000)
9.

Composition of gross estate

1. In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value
(FMV) of the painting at the time of the purchase was PI-million. Yuri paid all the corresponding
taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the
painting, already worth PI.5-million, to his only son, Zandro. The will also granted Zandro the
power to appoint his wife, Wilma, as successor to the painting in the event of Zandro’s death.
Zandro died in 2007, and Wilma succeeded to the property.
[a] Should the painting be included in the gross estate of Xavier in 2001 and thus, be subject to
estate tax? Explain. (3%)
SUGGESTED ANSWER:
Yes. The transmission of the property from Xavier to Zandro is subject to the estate tax because this is a
property within Xavier's control to dispose upon his death. The composition of the gross estate pertains to
properties owned and existing as of the time of death and to be transferred by the owner by death
(Section 85, NIRC), (BAR 2009)
2. Jose Ortiz owns 100 hectares of agricultural land planted to coconut trees. He died on May 30,
1994. Prior to his death, the government, by operation of law, acquired under the Comprehensive
Page | 136

Agrarian Reform Law all his agricultural lands except five (5) hectares. Upon the death of Ortiz, his
widow asked you how she will consider the 100 hectares of agricultural land in the preparation of
the estate tax return. What advice will you give her?
ANSWER:
The 100 hectares of land that Jose Ortiz owned but which prior to his death on May 30, 1994 were
acquired by the government under CARP are no longer part of his taxable gross estate, with the exception
of the remaining five (5) hectares which under Sec. 78(a) of the Tax Code still forms part of “decedent's
interest". (BAR 1994)
10. Items to be included in gross estate

1. Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died intestate on
November 15, 2009.
He left the following properties and interests:
House and lot (family home) in Pasig
Vacation house and lot in Florida, USA
Agricultural land in Naic, Cavite which he inherited from
his father
Car which is being used by his brother in Cavite
Proceeds of life insurance where he named his estate as
irrevocable beneficiary
Household furnitures and appliances
Claims against a cousin who has assets of P10,000 and
liabilities of PI00,000
Shares of stock in ABC Corp, a domestic enterprise
The expenses and charges on the estate are as follows:
Funeral Expenses
Legal fees for the settlement of the estate 500,000
Medical expenses of last illness
Claims against the estate

P 800,000
1,500,000
2,000,000
500,000
1,000,000
1,000,000
100,000
100,000
P 250,000
600,000
300,000

The compulsory heirs of Don Sebastian approach you and seek your assistance in the settlement of
his estate for which they have agreed to the above-stated professional fees. Specifically, they
request you to explain and discuss with them the following questions. You oblige:
A. What are the properties and interests that should be included in the computation of the
gross estate of the decedent? Explain. (2.5%)
SUGGESTED ANSWER:
All the properties and interests enumerated in the problem should be included in the gross estate of the
decedent. The composition of the gross estate of the decedent who is a citizen of the Philippines includes
all properties, real or personal, tangible or intangible, wherever situated and to the extent of the interest
that he has thereon at the time of his death (Sec. 85, NIRC).
2. On 30 June 2000, X took out a life insurance policy on his own life in the amount of P2,000,000.00.
He designated his wife, Y, as irrevocable beneficiary to P1,000,000.00 and his son, Z, to the balance
of P1,000,000.00 but, in the latter designation, reserving his right to substitute him for another. On
01 September 2003, X died and his wife and son went to the insurer to collect the proceeds of X’s
life insurance policy.
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Are the proceeds of the insurance to form part of the gross estate of X? Explain.
SUGGESTED ANSWER:
Only the proceeds of P1,000,000.00 given to the son, Z, shall form part of the Gross Estate of X. Under the
Tax Code, proceeds of life insurance shall form part of the gross estate of the decedent to the extent of the
amount receivable by the beneficiary designated in the policy of the insurance except when it is expressly
stipulated that the designation of the beneficiary is irrevocable. As stated in the problem, only the
designation of Y is irrevocable while the insured/decedent reserved the right to substitute Z as beneficiary
for another person. Accordingly, the proceeds received by Y shall be excluded while the proceeds received
by Z shall be included in the gross estate of X. (Section 85(E), 1997 Tax Code) (BAR 2003)
3. Cliff Robertson, an American citizen, was a permanent resident of the Philippines. He died in
Miami, Florida. He left 10.000 shares of Meralco, a condominium unit at the Twin Towers Building
at Pasig. Metro Manila and a house and lot in Los Angeles, California. What assets shall be included
in the Estate Tax Return to be filed with the BIR?
ANSWER:
All of Mr. Robertson’s assets consisting of10, 000 shares in the Meralco, a condominium unit in Pasig, and
his house and lot in Los Angeles, California are taxable. The properties of a resident alien decedent like Mr.
Robertson are taxable wherever situated (Secs. 77, 78 and 98, Tax Code). (BAR 1994)
11. Deductions from estate

1. Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died intestate on
November 15, 2009.
He left the following properties and interests:
House and lot (family home) in Pasig
Vacation house and lot in Florida, USA
Agricultural land in Naic, Cavite which he inherited from
his father
Car which is being used by his brother in Cavite
Proceeds of life insurance where he named his estate as
irrevocable beneficiary
Household furnitures and appliances
Claims against a cousin who has assets of P10,000 and
liabilities of PI00,000
Shares of stock in ABC Corp, a domestic enterprise
The expenses and charges on the estate are as follows:
Funeral Expenses
Legal fees for the settlement of the estate 500,000
Medical expenses of last illness
Claims against the estate

P 800,000
1,500,000
2,000,000
500,000
1,000,000
1,000,000
100,000
100,000
P250,000
600,000
300,000

The compulsory heirs of Don Sebastian approach you and seek your assistance in the settlement of
his estate for which they have agreed to the above-stated professional fees. Specifically, they
request you to explain and discuss with them the following questions. You oblige:
B. What is the net taxable estate of the decedent? Explain. (2.5%)
SUGGESTED ANSWER:
Page | 138

The net taxable estate of the decedent is P3,700,000.00. From the gross estate of P7 million the following
deductions are allowed: (1) funeral expenses of P200,000 which is the maximum allowed by law; (2) legal
fees amounting to P500,000; (3) medical expenses not to exceed P500,000; (4) Claims against the estate of
P300,000; (5) family home equivalent to its fair market value (not to exceed PI million) of P800,000; and
(6) standard deduction of PI million, or a total allowable deduction of P3,300,000 (Sec. 86, NIRC).
The claim against the cousin amounting to P100,000, although includable in the gross estate, cannot be
claimed as a deduction because the debtor is not yet declared insolvent. Likewise, the inherited property
cannot give rise to a vanishing deduction for want of sufficient factual basis (Sec. 86, NIRC).
2. In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value
(FMV) of the painting at the time of the purchase was PI-million. Yuri paid all the corresponding
taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the
painting, already worth PI.5-million, to his only son, Zandro. The will also granted Zandro the
power to appoint his wife, Wilma, as successor to the painting in the event of Zandro’s death.
Zandro died in 2007, and Wilma succeeded to the property.
[c] May a vanishing deduction be allowed in either or both of the estates? Explain. (3%)
SUGGESTED ANSWER:
Vanishing deduction shall be allowed to the estate of Xavier but only to the extent of Ya of the property
which is the portion acquired by gift (Section 100, NIRC), The donation took place within 5 years (1999 to
2001) from the death of Xavier; hence, there is a vanishing deduction. However, Zandro’s estate will not be
entitled to claim vanishing deduction because, first and foremost, the property previously taxed is not
includable in his gross estate and second, even if it is includable, the present decedent died more than 5
years from the death of the previous decedent, and that;a vanishing deduction is already claimed by the
previous estate involving the same property. (BAR 2009)
3. While driving his car to Baguio last month, Pedro Asuncion, together with his wife Assunta, and
only son, Jaime, met an accident that caused the instantaneous death of Jaime. The following day,
Assunta also died in the hospital. The spouses and their son had the following assets and liabilities
at the time of death:
Assunta
Exclusive

Jaime
Conjugal

Exclusive

Cash
P 10,000,000 P I,200,000
Cars
P 2,000,000
500,000
Land
P 5,000,000 2,000,000
Residential house
4,000,000
Mortgage payable
2,500,000
Funeral expenses
300,000
a) Is the Estate of Jaime Asuncion liable for estate tax? Explain. (4%)
SUGGESTED ANSWER:
a) No. The estate comprised of properties of only PI.2 million is not liable to any estate tax. The estate is
entitled to a standard deduction of PI million deductible from the gross estate without the benefit of
substantiation, thereby placing the net estate at only P200,000. Under the graduated tax rates of the
estate tax, a net estate of P200,000 is exempt. (Section 86(A)(5) and Section 84, NIRC).
b) Is vanishing deduction applicable to the Estate of Assunta Asuncion? Explain. (4%)
Page | 139

SUGGESTED ANSWERS:
b) Yes. The cash amount of PI .2 million transferred to his parents by his death is a property previously
taxed in so far as that portion attributable to his mother who died a day later is concerned. An estate
tax is considered to have been paid in the previous estate if a return was filed even if there was no tax
due in that return. The filing of a return is a means employed for the payment of the tax under the payas-you-file system. Considering that all the legal requirements of vanishing deduction are present, the
estate of Assunta can validly claim the same. (Section 86, NIRC). (BAR 2008)
4. Vanishing deduction is availed of by taxpayers to:
a.
b.
c.
d.

correct his accounting records to reflect the actual deductions made
reduce his gross income
reduce his output value-added tax liability
reduce his gross estate

Choose the correct answer. Explain. 5%
SUGGESTED ANSWER:
I choose (d), reduce his gross estate. Vanishing deduction or property previously taxed is one of the items
of deduction allowed in computing the net estate of a decedent [Section 86(AX2) and 86(3X2), NIRC]).
(BAR 2006)
5. On the first anniversary of the death of Y, his heirs hosted a sumptuous dinner for his doctors,
nurses, and others who attended to Y during his last illness. The cost of the dinner amounted to
Php 50,000.00. Compared to his gross estate, the Php 50.000.00 did not exceed five percent of the
estate. Is the said cost of the dinner to commemorate his one year death anniversary deductible
from his gross estate? Explain your answer. (5%)
SUGGESTED ANSWER:
No. This expense will not fall under any of the allowable deductions from gross estate. Whether viewed in
the context of either funeral expenses or medical expenses, the same will not qualify as a deduction.
Funeral expenses may include medical expenses of the last illness but not expenses incurred after burial
nor expenses incurred to commemorate the death anniversary. (De Guzman V. De Guzman, 83 SCRA 256).
Medical expenses, on the other hand, are allowed only if incurred by the decedent within one year prior to
his death. (Section 86(A)(6), NIRC). (BAR 2001)
6. Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack while on a business
trip to the USA. He died intestate on June 15. 2000 in New York City, leaving behind real properties
situated in New York; his family home in Valle Verde, Pasig City; an office condominium in Makati
City; shares of stocks in San Miguel Corporation; cash in bank; and personal belongings. The
decedent is heavily insured with Insular Life. He had no known debts at the time of his death. What
deductions may be claimed by the estate? (3%)
SUGGESTED ANSWER:
The deductions that may be claimed by the estate are:
1) The actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever
is lower, but in no case to exceed two hundred thousand pesos 1P200,000.00). [Sec. 86 (A) (1) (a).
NIRC of 1997]
2) The Judicial expenses in the testate or Intestate proceedings.(Sec. 86(A)(1)
3) The value of the decedent's family home located in Valle Verde, Pasig City in an amount not exceeding
one million pesos (PI,000,000.00), and upon presentation of a certification of the barangay captain of
the locality that the same have been the decedent's family home. (Sec. 86 (A) (4), Ibid]
4) The standard deduction of PI .000.000. (Sec. 86(A)(5)
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5) Medical expenses incurred within one year from death in an amount not exceeding P500,000.(Sec.
86(A)(6)
7. What is Vanishing deductions in estate taxation?
ANSWER:
Vanishing deductions or property previously taxed in estate taxation refers to the diminishing
deductibility/ exemption, at the rate of 20% over a period of five (5) years until it is lost after the fifth
year, of any property (situated in the Philippines) forming part of the gross estate, acquired by the
decedent from a prior decedent who died within a period of five (5) years from the decedent’s death. (BAR
1994)
12. Exclusions from estate
13. Tax credit for estate taxes paid in a foreign country
14. Exemption of certain acquisitions and transmissions

1. In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair market value
(FMV) of the painting at the time of the purchase was PI-million. Yuri paid all the corresponding
taxes on the transaction. In 2001, Xavier died. In his last will and testament, Xavier bequeathed the
painting, already worth PI.5-million, to his only son, Zandro. The will also granted Zandro the
power to appoint his wife, Wilma, as successor to the painting in the event of Zandro’s death.
Zandro died in 2007, and Wilma succeeded to the property.
[b] Should the painting be included in the gross estate of Zandro in 2007 and thus, be subject to
estate tax? Explain. (3%)
SUGGESTED ANSWER:
No. The transmission from the first heir, legatee or donee in favor of another beneficiary, in accordance
with the desire of the predecessor is an exempt transfer (Section 87, NIRC), Zandro has no control over the
disposition of the property at the time of his death; hence, the estate tax which imposed the privilege of
transmitting properties upon his death will not apply.
ALTERNATIVE ANSWER:
No. The property passes from Zandro to Wilma by virtue of the special power of appointment granted by
Xavier. The law includes as part of the gross estate of the decedent a property passing under general (not
special) power of appointment. The grantee of the power to appoint, Zandro, has no control over the
disposition of the property because it is the desire of the grantor of the power that the property will go to
a specific person. This being so, the painting should not be included in the gross estate of Zandro, hence, it
is not subject to estate tax (Section 85(D), NIRC). (BAR 2009)
15. Filing of notice of death
16. Estate tax return

1. Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died intestate on
November 15, 2009.
He left the following properties and interests:
House and lot (family home) in Pasig
Vacation house and lot in Florida, USA
Agricultural land in Naic, Cavite which he inherited from
his father

P 800,000
1,500,000
2,000,000
Page | 141

Car which is being used by his brother in Cavite
Proceeds of life insurance where he named his estate as
irrevocable beneficiary
Household furnitures and appliances
Claims against a cousin who has assets of P10,000 and
liabilities of PI00,000
Shares of stock in ABC Corp, a domestic enterprise
The expenses and charges on the estate are as follows:
Funeral Expenses
Legal fees for the settlement of the estate 500,000
Medical expenses of last illness
Claims against the estate

500,000
1,000,000
1,000,000
100,000
100,000
P250,000
600,000
300,000

The compulsory heirs of Don Sebastian approach you and seek your assistance in the settlement of
his estate for which they have agreed to the above-stated professional fees. Specifically, they
request you to explain and discuss with them the following questions. You oblige:
C. When is the due date for filing and payment of the applicable tax return and tax? Are
these dates extendible? If so, under what conditions or requirements? (2.5%)
SUGGESTED ANSWER:
The filing of the return and payment of the tax is within 6 months from date of death following the pay-asyou-file concept. The period to file the return is extendible for a maximum of 30 days under meritorious
cases as maybe determined by the Commissioner. The payment of the estate tax may also be extended
when the Commissioner finds that the payment of the tax on the due date would impose undue hardship
upon the estate or any of the heirs. The period of extension to pay shall not exceed 5 years if the estate is
settled through the courts, or shall not exceed 2 years if settled extrajudicially. The Commissioner may
require the executor, or administrator, or the beneficiary to furnish a bond in an amount not more than
double the amount of estate tax due (Sec. 92, NIRC).
2. Remedios, a resident citizen, died on November 10, 2006. She died leaving three condominium
units in Quezon City valued at P5 Million each. Rodolfo was her only heir. He reported her death on
December 5, 2006 and filed the estate tax return on March 30,2007. Because he needed to sell one
unit of the condominium to pay for the estate tax, he asked the Commissioner of Internal Revenue
to give him one year to pay the estate tax due. The Commissioner approved the request for
extension of time provided that the estate tax be computed on the basis of the value of the property
at the time of payment of the tax.
a) Does the Commissioner of Internal Revenue have •the power to extend the payment of estate
tax? If so, what are the requirements to allow such extension?
SUGGESTED ANSWER:
Yes. The Commissioner may allow an extension of time to pay the estate tax if the payment on the due date
would impose undue hardship upon the estate or any of the heirs. The extension, in any case, will not
exceed two years if the estate is hot under judicial settlement or five years if it is under judicial settlement.
The Commissioner may also require the posting of a bond to secure the payment of the tax. (Section 91(B),
NIRC).
ALTERNATIVE ANSWER:
Yes. The requirements to be complied with so that an extension may be allowed are: (1) a request for
extension must be filed before the expiration of the original period to pay which is within 6 months from
death; (2) there must be a finding that the payment on the due date of the estate tax would impose undue
Page | 142

hardship upon the estate or any of the heirs; (3) the extension must be for a period of not exceeding 5
years if the estate is settled judicially or 2 years if settled extrajudicially; and (4) the Commissioner may
require the posting of a bond in an amount not exceeding double the amount of tax to secure the payment
thereof. (Section 91(B), NIRC). (BAR 2007)
3. Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack while on a business
trip to the USA. He died intestate on June 15. 2000 in New York City, leaving behind real properties
situated in New York; his family home in Valle Verde, Pasig City; an office condominium in Makati
City; shares of stocks in San Miguel Corporation; cash in bank; and personal belongings. The
decedent is heavily insured with Insular Life. He had no known debts at the time of his death. When
and where shall the return be filed and estate tax paid? (3%)
SUGGESTED ANSWER:
The estate tax return shall be filed within six (6) months from the decedent’s death (Sec. 90 (B), NIRC of
1997], provided that the Commissioner of Internal Revenue shall have authority to grant in meritorious
cases, a reasonable extension not exceeding thirty (30) days for filing the return. (Sec. 90 (c). Ibid]
Except in cases where the Commissioner of Internal Revenue otherwise permits, the estate tax return shall
be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized
Treasurer of Pasig City, the City in which the decedent Mr. de la Cruz was domiciled at the time of his
death. [Sec. 90 (D), NIRC of 1997) (BAR 2000)
4. A died, survived by his wife and three children. The estate tax was properly paid and the estate
settled and divided and distributed among the four heirs. Later, the BIR found out that the estate
failed to report the income received by the estate during administration. The BIR issued a
deficiency income tax assessment plus interest, surcharges and penalties. Since the 3 children are
residing abroad, the BIR sought to collect the full tax deficiency only against the widow. Is the BIR
correct? (10%)
SUGGESTED ANSWER:
Yes, the BIR is correct. In a case where the estate has been distributed to the heirs, the collection remedies
available to the BIR in collecting tax liabilities of an estate may either (1) sue all the heirs and collect from
each of them the amount of tax proportionate to the inheritance received or (2) by virtue of the lien
created under Section 219, sue only one heir and subject the property he received from the estate to the
payment of the estate tax. The BIR, therefore, is correct in pursuing the second remedy although this will
give rise to the right of the heir who pays to seek reimbursement from the other heirs. (CIR v. Pineda, 21
SCRA 105). In no case, however, can the BIR enforce the tax liability in excess of the share of the widow in
the inheritance. (BAR 1999)
5. On September 10, 1991, a Bank Manager of People’s Bank, Inc. (PBI), upon reading an obituary
announcing the death of Mr. Roberto Diaz refused to allow one of his heirs to withdraw Mr. Diaz’
deposit amounting to P2 Million.
A week later, immediately following said denial, the administrator of the estate sued the
Bank/Bank Manager to compel them to release the money since such act was arbitrary and
constituted a denial of property/constitutional rights.
If you are retained as counsel by the Bank/Bank Manager to defend their stand in refusing to
release the P2 Million to the heirs, what would you raise as a legal defense? Discuss.
ANSWER:
I would raise the defense that under Sec. 90 of the NIRC a bank with knowledge of the death of a person
who maintains a deposit account with such bank shall allow withdrawals therefrom only if the mandatory
Page | 143

requirement of a certification from the Commissioner that the taxes due thereon have been paid could be
presented by an heir. Absent such certification, a bank is authorized to withhold the release of deposits of
a decedent.
Under the same set of facts, would you, as administrator of the estate, rather file an administrative
appeal with the Commissioner of Internal Revenue or a petition for review with the Court of Tax
Appeals? Explain.
ANSWER:
An administrative appeal to the Commissioner of Internal Revenue would not be a proper remedy without
an original proceeding having first been filed with the BIR
A petition for review with the Court of Tax Appeals, on the other hand, requires a final decision of the
Commissioner, the CTA being a court of exclusive appellate jurisdiction.
As administrator, I would cause the payment of the proper taxes on the deposits and thereafter, secure the
required certification from the Commissioner. (BAR 1992)
6. If the Commissioner of Internal Revenue allows the administrator of the estate or the heirs of the
decedent to withdraw from the deposit account, what are the conditions under the Tax Code which
have to be met first?
ANSWER:
Before withdrawals on deposits of a decedent could be permitted, the proper taxes should first be paid
and a certification of such payment secured from the Commissioner. However, the Commissioner may
authorize the withdrawal without a certification provided the amount to be withdrawn shall not exceed P
10,000.00.
ALTERNATIVE ANSWER:
Payment of the tax or the filing of a bond would, in substance, be enough for the Commissioner to allow
the withdrawal. (BAR 1992)
C. Donor’s tax
1. Basic principles
2. Definition
3. Nature
4. Purpose or object
5. Requisites of valid donation
6. Transfers which may be constituted as donation
a. Sale/exchange/transfer of property for insufficient consideration
1. Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died intestate on
November 15, 2009.
He left the following properties and interests:
House and lot (family home) in Pasig
Vacation house and lot in Florida, USA
Agricultural land in Naic, Cavite which he inherited from
his father
Car which is being used by his brother in Cavite
Proceeds of life insurance where he named his estate as
irrevocable beneficiary
Household furnitures and appliances

P 800,000
1,500,000
2,000,000
500,000
1,000,000
1,000,000
Page | 144

Claims against a cousin who has assets of P10,000 and
liabilities of PI00,000
Shares of stock in ABC Corp, a domestic enterprise
The expenses and charges on the estate are as follows:
Funeral Expenses
Legal fees for the settlement of the estate 500,000
Medical expenses of last illness
Claims against the estate

100,000
100,000
P250,000
600,000
300,000

The compulsory heirs of Don Sebastian approach you and seek your assistance in the settlement of
his estate for which they have agreed to the above-stated professional fees. Specifically, they
request you to explain and discuss with them the following questions. You oblige:
SUGGESTED ANSWER:
If the renunciation is a general renunciation such that the share of the heir who waives his right to the
inheritance goes to the other co-heirs in accordance with their respective interest in the inheritance, the
law on accretion applies and the property waived is considered to pass through the other co-heirs by
inheritance; hence, it has no tax implication. Undoubtedly, when the compulsory heir renounced his share
in the inheritance, he did not donate the property which had never become his. Such being the case, the
renunciation is not subject to the donor's tax.
If it is not a general renunciation in favor of the other co-heirs, the heir renouncing his right is considered
to have made a donation and the renunciation is subject to donor’s tax. In both cases, however, the
renunciation has no tax implication to the other co-heirs (BIR Ruling No. DA-(DT-039) 396-09, dated July
23, 2009).
2. ABC Corporation sold a real property in Malolos, Bulacan to XYZ Corporation. The property has
been classified as residential and with a zonal valuation of PI,000 per square meter. The capital
gains tax was paid based on the zonal value. The Revenue District Officer (RDO), however, refused
to issue the Certificate Authorizing Registration for the reason that based on his ocular inspection
the property should have a higher zonal valuation determined by the Commissioner of Internal
Revenue because the area is already a commercial area. Accordingly, the RDO wanted to make a
recomputation of the taxes due by using the fair market value appearing in a nearby bank’s
valuation list which is practically double the existing zonal value. The RDO also wanted to assess a
donor’s tax on the difference between the selling price based on the zonal value and the fair
market value appearing in a nearby bank’s valuation list.
Should the difference in the supposed taxable value be legally subject to donor’s tax? Reason
briefly.
SUGGESTED ANSWER:
No. The difference in the supposed taxable value cannot be legally subject to the donor’s tax, because the
use of a fair market value other than that prescribed by the Tax Code is not allowed for computing any
internal revenue tax. (Section 6(E), NIRC).
ALTERNATIVE ANSWER:
The difference in value is not subject to donor’s tax, because the sale is not for an insufficient
consideration. A deemed gift subject to tax arises only if a tax is avoided as a result of selling a property at
a price lower than its fair market value. In a sale subject to the 6% capital gains tax, the tax is always based
on the gross selling price or fair market value, whichever is higher, and therefore, the seller cannot avoid
any tax by selling his property below its fair market value. This means that the deemed gift provision
provided for under the Tax Code will not apply to a sale of real property subject to the 6% capital gains
tax. (Section 100, NIRC). (BAR 2007)
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b. Condonation/remission of debt
1. 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 enpago 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 on the discharge of the unpaid balance of the obligation on the debtor
corporation?
(b) Insofar as the creditor is concerned, how is he effected taxwise as a consequence of the
transaction?
ANSWER:
(a) The condonation of the unpaid balance of the obligation has the effect of a donation made on the
part of the creditor. It is obvious that the creditor merely desires to benefit the debtor and without
any consideration therefore cancels the debt, the amount of the debt cancelled is a gift from the
creditor to the debtor and need not be included in the latter's gross income (Sec.50, RR No. 2);
(b) For the difference of P70.000, the creditor shall be subject to donor’s tax at the applicable rates
provided for under the National Internal Revenue Code.
ALTERNATIVE ANSWER:
(a) If the discharge was prompted by the insolvency of the debtor company, then it is a clear case of a
write-off of a bad debt which has no tax consequence to the debtor.
(b) The write-off of the bad debt will entitle the creditor to claim the same as a deduction from its
gross income. (BAR 1997)
2. Mr. Francisco borrowed P10,000.00 from his friend Mr. Gutierrez payable in one year without
interest. When the loan became due Mr. Francisco told Mr. Gutierrez that he (Mr. Francisco) was
unable to pay because of business reverses. Mr. Gutierrez took pity on Mr. Francisco and condoned
the loan. Mr. Francisco was solvent at the time he borrowed the P 10,000.00 and at the time the
loan was condoned.
Did Mr. Francisco derive any income from the cancellation or condonation of his indebtedness?
Explain.
ANSWER:
No, Mr. Francisco did not derive any income from the cancellation or condonation of his indebtedness.
Since it is obvious that the creditor merely desired to benefit the debtor in view of the absence of
consideration for the cancellation, the amount of the debt is considered as a gift from the creditor to the
debtor and need not be included in the latter’s gross income. (BAR 1995)
7.

Transfer for less than adequate and full consideration

1. A, an individual, sold to B. his brother-in-law, his lot with a market value of P1,000.000 for
P600.000. A’s cost in the lot is P100,000. B is financially capable of buying the lot.
A also owns X Co.. which has a fast growing business. A sold some of his shares of stock in X Co. to
his key executives in X Co. These executives are not related to A. The selling price is P3.000.000,
which is the book value of the shares sold but with a market value of P5,000,000. A’s cost in the
shares sold is PI ,000,000. The purpose of A in selling the shares is to enable his key executives to
Page | 146

acquire a propriety of A in selling the shares is to enable his key executives to acquire a propriety
interest in the business and have a personal stake in its business.
Explain if the above transactions are subject to donor's tax. (5%)
SUGGESTED ANSWER:
The first transaction where a lot was sold by A to his brother-in-law for a price below its fair market value
will not be subject to donor's tax if the lot qualifies as a capital asset. The transfer for less than adequate
and full consideration, which gives rise to a deemed gift, does not apply to a sale of property subject to
capital gains tax. (Section 100, NIRC). However, if the lot sold is an ordinary asset, the excess of the fair
market value over the consideration received shall be considered as a gift subject to the donor's tax.
The sale of shares of stock below the fair market value thereof is subject to the donor's tax pursuant to the
provisions of Section 100 of the Tax Code. The excess of the fair market value over the selling price is a
deemed gift.
ALTERNATIVE ANSWER:
The sale of shares of stock below the fair market value will not give rise to the imposition of the donor's
tax. In determining the gain from the transfer, the selling price of the shares of stocks shall be the fair
market value of the shares of stocks transferred. (Section 6, RR No. 2- 82). In which case, the reason for the
imposition of the donor's tax on sales for inadequate consideration does not exist. (BAR 1999)
8.

Classification of donor

1. Miguel, a citizen and resident of Mexico, donated US$1,000.00 worth of stocks in Barack Motors
Corporation, a Mexican company, to his legitimate son, Miguelito, who is residing in the Philippines
and about to be married to a Filipino girlfriend. Mexico does not impose any transfer tax of
whatever nature on all gratuitous transfers of property.
lb] Is Miguel entitled to the rule of reciprocity in order to be exempt from the Philippine donor’s
tax? Why or why not? (3%)
SUGGESTED ANSWER:
No. The donation is not subject to the Philippine donor's tax because the donor is a non-resident alien and
the property donated is a property not situated in the Philippines. The rule of reciprocity applies only if
the property transferred by a non- resident alien is an intangible personal property situated in the
Philippines. This is designed to reciprocate the exemption from donor's tax granted by a foreign country
to Filipinos who are not residing thereat. (Section 104, NIRC). (BAR 2009)
2. X, a multinational corporation doing business in the Philippines donated 100 shares of stock of
said corporation to Mr. Y, its resident manager in the Philippines.
What is the tax liability, if any, of X corporation?
ANSWER:
Foreign corporations effecting a donation is subject to donor’s tax only if the property donated is located
in the Philippines. Accordingly, donation of a foreign corporation of its own shares of stocks in favor of
resident employees, is not subject to donor’s tax (BIR Ruling No. 018-87, January 26, 1987). However, if
85% of the business of the foreign corporation is located in the Philippines or the shares donated have
acquired business situs in the Philippines, the donation may be taxed in the Philippines subject to the rule
of reciprocity.
9. Determination of gross gift
10. Composition of gross gift
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11. Valuation of gifts made in property

3. Kenneth Yusoph owns a commercial lot which he bought many years ago for PI Million. It is now
worth P20 Million although the zonal value is only P15 Million. He donates one- half pro-indiviso
interest in the land to his son Dino on 31 December 1994, and the other one-half pro-indiviso
interest to the same son on 2 January 1995.
1) How much is the value of the gifts in 1994 and 1995 for purposes of computing the gift tax?
Explain.
2) The Revenue District Officer questions the splitting of the donations into 1994 and 1995. He
says that since there were only two (2) days separating the two donations they should be
treated as one. having been made within one year. Is he correct? Explain.
3) Dino subsequently sold the land to a buyer for P 20 Million. How much did Dino gain on the
sale? Explain.
4) Suppose, instead of receiving the lot by way of donation, Dino received it by inheritance.
What would be his gain on the sale of the lot for P20 Million? Explain.
ANSWER:
1) The value of the gifts for purposes of computing the gift tax shall be P 7.5 million in 1994 and
P7.5millionin 1995. In valuing a real property for gift tax purposes the property should be
appraised at the higher of two values as of the time of donation which are (a) the fair market value
as determined by the Commissioner {which is the zonal value fixed pursuant to Section 16(e) of
the Tax Code), or (b) the fair market value as shown in the schedule of values fixed by the
Provincial and City Assessors. The fact that the property is worth P20 million as of the time of
donation is immaterial unless it can be shown that this value is one of the two values mentioned as
provided under Section 81 of the Tax Code.
2) The Revenue District Officer is not correct because the computation of the gift tax is cumulative
but only insofar as gifts made within the same calendar year. Therefore, there is no legal
Justification for treating two gifts effected in two separate calendar years as one gift.
3) Dino gained an income of 19 million from the sale. Dino acquires a carry-over basis which is the
basis of the property in the hands of the donor or PI million. The gain from the sale or other
disposition of property shall be the excess of the amount realized therefrom over the basis or
adjusted basis for determining gain (Sec. 34(a), NIRC). Since the property was acquired by gift, the
basis for determining gain shall be the same as if it would be in the hands of the donor or the last
preceding owner by whom the property was not acquired by gift. Hence, the gain is computed by
deducting the basis of PI million from the amount realized which is P20 million.
4) If the commercial lot was received by inheritance the gain from the sale for P20 million is P5
million because the basis is the fair market value as of the date of acquisition. The stepped-up basis
of P15 million which is the value for estate tax purposes is the basis for determining the gain (Sec.
34(b)(2), NIRC).
ALTERNATIVE ANSWER:
If Dino held on to the property as a capital asset in that it is neither for sale in the ordinary course of
business nor used in Dino’s business, then upon sale thereof there is presumed to be realized an income of
P20 million which is the gross selling price of the property. (Sec. 21(e), NIRC). The same would be subject
to the 5% capital gains tax. (BAR 1995)
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12. Tax credit for donor’s taxes paid in a foreign country
13. Exemptions of gifts from donor’s tax

1. Miguel, a citizen and resident of Mexico, donated US$1,000.00 worth of stocks in Barack Motors
Corporation, a Mexican company, to his legitimate son, Miguelito, who is residing in the Philippines
and about to be married to a Filipino girlfriend. Mexico does not impose any transfer tax of
whatever nature on all gratuitous transfers of property.
[a] Is Miguel entitled to claim a dowry exclusion? Why or why not? (3%)
SUGGESTED ANSWER:
Miguel, a non-resident alien, is not allowed any dowry exclusion. The dowry applies only to a donor who is
either a citizen or resident of the Philippines (Section 101(AX1), NIRC). (BAR 2009)
2. The Congregation of the Mary Immaculate donated a land and a dormitory building located along
Espana St. in favor of the Sisters of the Holy Cross, a group of nuns operating a free clinic and high
school teaching basic spiritual values. Is the donation subject to donor’s tax? Reason briefly.
SUGGESTED ANSWER:
No. Gifts in favor of an educational and/or charitable, religious, social welfare corporation, or cultural
institution, accredited non-government organization, trust or philanthropic organization or research
institution or organization are exempt from the donor's tax, provided, that, not more than 30% of the gifts
are used for administration purposes. The donation being in the nature of a real property complies with
the utilization requirement. (Section 101(A)(3), NIRC). (BAR 2007)
3. What conditions must occur in order that all grants, donations and contributions to non-stock,
non-profit private educational institutions may be exempt from the donor’s tax under Section 101
(a) of the Tax Code? (3%)
SUGGESTED ANSWER:
The following are the conditions:
1) Not more than thirty percent (30%) of said gifts shall be used by such donee for administration
purposes;
2) The educational institution is incorporated as a non¬stock entity, paying no dividends, governed
by trustees who receive no compensation, and devoting all its income, whether students' fees or
gifts, donations, subsidies or other forms of philanthropy, to the accomplishment and promotion of
the purposes enumerated in its Articles of Incorporation. [Sec. 101 (A) (3), NIRC of 1997) (BAR
2000)
4. Ace Tobacco Corporation bought a parcel of land situated at Pateros and donated it to the
Municipal Government of Pateros for the sole purpose of devoting the said land as a relocation site
for the less fortunate constituents of said municipality. In accordance therewith, the Municipal
Government of Pateros issued to the occupants/beneficiaries Certificates of Award giving to them
the respective areas where their houses are erected. Through Ordinance No.2. Series of 1998, the
said municipal government ordained that the lots awarded to the awardees/donees be finally
transferred and donated to them. Determine the tax consequence of the foregoing dispositions
with respect to Ace Tobacco Corporation, the Municipal Government of Pateros, and the
occupants/beneficiaries. [5%]
SUGGESTED ANSWER:
The donation by Ace Tobacco Corporation is exempt from the donor's tax because it qualifies as a gift to or
for the use of any political subdivision of the National Government (Section 101(2), NIRC). The
conveyance is likewise exempt from documentary stamp tax because it is a transfer without consideration.
Page | 149

Since the donation is to be used as a relocation site for the less fortunate constituents of the municipality,
it may be considered as an undertaking for human settlements, hence the value of the land may be
deductible in full from the gross income of Ace Tobacco Corporation if in accordance to a National Priority
Plan determined by the National Economic Development Authority. (Sec. 34[H](2)(a), NIRC). If the
utilization is not in accordance to a National Priority Plan determined by the National Economic
Development Authority, then Ace Tobacco Corporation may deduct the value of the land donated only to
the extent of five (5%) percent of its taxable income derived from trade or business as computed without
the benefit of the donation. (Sec. 34[Hl(2)(a) in relation to Sec. 34[H](1), NIRC).
The Municipality of Pateros is not subject to any donor’s tax on the value of land it subsequently donated,
it being exempt from taxes as a political subdivision of the National Government.
The occupants/beneficiaries are subject to real property taxes because they now own the land.
Alterative Answer on Taxability of Municipality and Awardees:
The awarding by the Municipal Government of lots to specific awardees or donees is likewise exempt from
the donor's tax because it is only an implementation of the purpose for which the property was given by
Ace Tobacco Corporation. The purpose of the first donation is to devote the land as a relocation site for the
less fortunate constituents. If later on the Municipality gives out Certificates of Award over specific lots
occupied by the qualified occupants/beneficiaries, this is intended to perpetuate the purpose of the
previous donor, the Municipality acting merely as a conduit and not the true donor. This is simply a
donation by the Municipality in form but not in substance.
The receipt by the occupant beneficiaries of their respective lots through the Certificate of Award has no
tax implications. They are, however, liable for real property taxes. (BAR 1998)
5. Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup Boxing Council,
a sports associa¬tion duly accredited by the Philippine Boxing Association. Onyoc received the
amount of P500,000 as his prize which was donated by Ayala Land Corporation. The BIR tried to
collect income tax on the amount received by Onyoc and donor’s tax from Ayala Land Corporation,
which taxes, Onyoc and Ayala Land Corporation refuse to pay. Decide.
ANSWER:
The prize will not constitute a taxable income to Onyoc, hence the BIR is not correct in imposing the
income tax. RA. No. 7549 explicitly provides that “All prizes and awards granted to athletes in local and
International sports tournaments and competitions held in the Philippines or abroad and sanctioned by
their respective national sports associations shall be exempt from income tax".
Neither is the BIR correct in collecting the donor’s tax from Ayala Land Corporation. The law is clear when
it categorically stated “That the donor’s of said prizes and awards shall be exempt from the payment of the
donor’s tax." (BAR 1996)
6. In 1991. Imelda gave her parents a Christmas gift of P 100.000.00 and a donation of P80.000.00 to
her parish church. She also donated a parcel of land for the construction of a building to the PUP
Alumni Association, a non-stock, non-profit organization. Portions of the building shall be leased
to generate income for the association.
(a) Is the Christmas gift of P100.000.00 to Imelda's parents subject to tax?
(b) How about the donation to the parish church?
(c) How about the donation to the P.U.P, Alumni Association?
ANSWER:
(a) The Christmas gift of PI00,000.00 given by Imelda to her parents is taxable up to P50.000.00because
under the law (Sec. 92 (a) of the Tax Code), net gifts not exceeding P50.000.00 are exempt.
Page | 150

(b) The donation of P80.000.00 to the parish church even assuming that it is exclusively for religious
purposes is not tax-exempt because the exemption granted under Article VI. Sec. 28(3) of the
Constitution applies only to real estate taxes [Uadoc v. Commissioner, 14 SCRA 292).
(c) The donation to the P.U.P. Alumni Association does not also qualify for exemption both under the
Constitution and the aforecited law because it is not an educational or research organization,
corporation, institution, foundation or trust.

ALTERNATIVE ANSWER:
Donation to the P.U.P. Alumni Association is exempt from donor's tax if it is proven that the association is
a nonstock, non-profit charitable association, paying no dividends, governed by trustees who receive no
compensation, and devoting all its income to the accomplishment and promotion of the purposes
enumerated in its articles of incorporation. Not more than 30% of the gift should be used for
administration purposes by the donee. (BAR 1994)
7. Can you name one kind of gift that is exempt from donor’s tax which is extendible to both residents
and nonresidents or non-citizens of the Philippines? Include qualifications, If any.
ANSWER:
Gifts made to or for the use of the National Government or any entity created by any of its agencies which
is not conducted for profit, or to any political subdivision of the said Government are exempt from gift tax
with respect to both residents and non-residents. (BAR 1992)
14. Person liable
15. Tax basis

1. Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners of a residential
house and lot in Quezon City. After the recent wedding of their son, Mario, to Maria, the spouses
donated said real property to them. At the time of donation, the real property has a fair market
value of P2 million.
Are Jose and Clara subject to donor’s tax? If so, how much is the taxable gift of each spouse and
what rate shall be applied to the gift? Explain. (4%)
SUGGESTED ANSWERS:
Yes. Jose and Clara are subject to donor’s tax. Since the real property is either conjugal or absolute
community property, each spouse is deemed to have made separate donation of one-half of the value of
the property [Tang Ho v. Board of Tax appeals, 97 Phil. 899 [1955]).
For Jose, he is considered to have made two donations: one, is in favor of his son who is a relative, and two,
in favor of his son’s wife who is a stranger. The taxable gift to the son is P490,000 computed by deducting
from the gross gift the dowry exclusion of P10,000. The net gift is subject to the graduated tax rates of 2%
to 15%. The taxable gift to his son’s wife is P500,000 subject to the 30% flat rate on donation to strangers.
(Sections 99 and 101, NIRC).
Clara is subject to the donor’s tax in exactly the same manner as Jose, being considered to have effected
likewise two donations. (BAR 2008)
2. Your bachelor client, a Filipino residing in Quezon City, wants to give his sister a gift of Php
200,000.00. He seeks your advice, for purposes of reducing if not eliminating the donor’s tax on the
gift, on whether it is better for him to give all of the Php 200,000.00 on Christmas 2001 or to give
Php 100,000.00on Christmas 2001 and the other Php 100,000.00 on January 1, 2002. Please
explain your advice. (5%)
Page | 151

SUGGESTED ANSWER:
I would advise him to split the donation. Giving the Php200,000 as a one-time donation would mean that it
will be subject to a higher tax bracket under the graduated tax structure thereby necessitating the
payment of donor's tax. On the other hand, splitting the donation into two equal amounts of Php100,000
given on two different years will totally relieve the donor form the donor is tax because the first Php l00,
000 donation in the graduated brackets is exempt. (Section 99, NIRC). While the donor is tax is computed
on the cumulative donations, the aggregation of all donations made by a donor is allowed only over one
calendar year. (BAR 2001)
3. When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net
gifts. For purposes of this tax, who is a stranger? (2%)
SUGGESTED ANSWER:
A stranger is a person who is not a:
1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or
2) Relative by consanguinity in the collateral line within the fourth degree of relationship." [Sec.
98 (B), NIRC of 1997] (BAR 2000)
4. Kenneth Yusoph owns a commercial lot which he bought many years ago for PI Million. It is now
worth P20 Million although the zonal value is only P15 Million. He donates one- half pro-indiviso
interest in the land to his son Dino on 31 December 1994, and the other one-half pro-indiviso
interest to the same son on 2 January 1995.
The Revenue District Officer questions the splitting of the donations into 1994 and 1995. He says
that since there were only two (2) days separating the two donations they should be treated as one
having been made within one year. Is he correct? Explain.
ANSWER:
The Revenue District Officer is not correct because the computation of the gift tax is cumulative but only
insofar as gifts made within the same calendar year. Therefore, there is no legal Justification for treating
two gifts effected in two separate calendar years as one gift. (BAR 1995)
5. Mr. Bill Morgan, a Canadian citizen and a resident of Scarborough, Ontario, sends a gift check of
$20,000.00 to his future Filipino daughter-in-law who is to be married to his only son in the
Philippines.
Is the donation by Mr. Morgan subject to tax? Explain.
ANSWER:
Yes. While the gift has been made on account of marriage, to qualify for exemption to the extent of the first
P10, 000 (now P50.000.00) of the value thereof, such gift should have been given to a legitimate,
recognized natural or adopted child of the donor.
ALTERNATIVE ANSWER:
It is not subject to tax because the gift was made outside the Philippines.
What is the tax consequences, if any, to the donee (Filipino daughter-in-law of Mr. Morgan)?
ANSWER:
The gift, with respect to the donee, is excluded from gross income and is exempt from Income taxation.
There is no donee’s gift tax. (BAR 1992)
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D. Value-Added Tax (VAT)
1. Concept
1. Your client. United Market Cooperative is requesting the Commissioner of Internal Revenue to
exempt it from the payment of VAT on its purchase of prime commodities from food
suppliers/manufacturers on the ground that it is exempt from all taxes, including VAT, under RA.
No. 6938, the Cooperative Code of the Philippines.
Do you think your client can obtain the necessary exemption from the BIR? If your answer is in the
affirmative, explain the basis for the grant. If in the negative, state the basis for the rejection of the
request.
ANSWER:
1) An exemption is not necessary. The value added tax is not on the purchase but on the sellers, except in
importation.
2)

No. The exemption to which the taxpayers are entitled to refers to those taxes that are levied on the
exempt taxpayer or directly imposed on the exempted goods. The value added tax is imposed on the
sellers of goods and services, not the purchaser.

ALTERNATIVE ANSWER:
Yes. Under the NIRC, transactions which are exempted by special laws from the payment of value-added
taxes shall be so exempt. RA 6938.the Cooperative Code of the Philippines is a special law entitling the
United Market Cooperative in the case at bar to exemption from VAT. (BAR 1992)
2. Newtex International (Phils.) Inc. is an American firm duly authorized to engage in business in the
Philippines as a branch office. In its activity of acting as a buying agent for foreign buyers of shirts
and dresses abroad and performing liason work between its home office and the Filipino garment
manufacturers and exporters. Newt ex does not generate any income. To finance its office
expenses here, its head office abroad regularly remits to it the needed amount. To oversee its
operations and manage its office here, which had been in operation for two (2) years, the head
office assigned three (3) foreign personnel.
Is Newtex International (Phils.) Inc. subject to VAT?
ANSWER:
Newtex International (Phils.) Inc.. is not subject to VAT. The VAT is imposed on sellers and not on buyers.
The branch office did not derive any income or compensation so as to possibly permit the imposition of a
VAT on compensation for services rendered. In addition, since the transactions are direct export sales, the
VAT does not apply. Export sales are among those that are either zero rated or exempt from VAT (Secs.
99-100, NIRC). (BAR 1991)
2.

Characteristics/Elements of a VAT-Taxable transaction

1. What are the characteristics of the Value-Added Tax?
ANSWER:
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the buyer,
transferee or lessee of the goods, properties or services.
Page | 153

ALTERNATIVE ANSWER:
The value-added tax has the following characteristics:
a.
b.
c.
d.
e.

It is an indirect tax where tax shifting is always presumed:
It is consumption-based;
It is imposed on the value-added in each stage of distribution;
It is a credit-invoice method value-added tax; and
It is not a cascading tax. (BAR 1996)
3.
4.
5.

Impact of tax
Incidence of tax
Tax credit method

1. JKL Corporation is a domestic corporation engaged in the importation and sale of motor vehicles in
the Philippines and is duly registered with the Subic Bay Metropolitan Authority (SBMA). In
December 2007, it imported several second-hand motor vehicles from Japan and Korea, which it
stores in a warehouse in Subic Bay. It sold these motor vehicles in April 2008, to persons residing
in the customs territory.
A) Are the importations of motor vehicles from abroad subject to customs duties and value added
taxes? Explain. (4%)
SUGGESTED ANSWER:
a) No. The importation from abroad to the Subic Bay Freeport Zone is exempt from customs duties and
value-added taxes. The Freeport Zone is an extension of a foreign territory so that the vehicles
imported while still within its secured perimeter is not subject to Philippine taxes. (RMC No. 50-2007;
Seagate Technology Inc., v. Commissioner, 451 SCRA 132 [2005]). (BAR 2008)
6.
7.

Destination principle
Persons liable

1. Melissa inherited from her father a 300-square-meter lot. At the time of her father’s death on
March 14, 1995, the property was valued at P720,000.00. On February 28, 1996, to defray the cost
of the medical expenses of her sick son, she sold the lot for P600.000.00, on cash basis. The
prevailing market value of the property at the time of the sale was P3.000.00 per square meter.
Is Melissa liable to pay Value Added Tax (VAT) on the sale of the property? If so, how much and
why? If not, why not? (4%)
SUGGESTED ANSWER:
No, Melissa is not liable to pay the VAT because she is not in the real estate business. A sale, of real
property not in the course of trade or business is not subject to VAT (Section 105 and Section 109(1)(P),
NIRC). (BAR 2009)
2. Who are liable for the payment of Value-Added Tax?
ANSWER:
The persons liable for the value-added tax are:
a. Sellers of goods and properties in the course of trade or business:
b. Sellers of services in the course of trade or business, including lessors of goods and properties:
c. Importers of taxable goods, whether in the course of business or not (BAR 1996)
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8.

VAT on sale of goods or properties

1. Are the following transactions subject to VAT? If yes, what is the applicable rate for each
transaction. State the relevant authority/ies for your answer.
Sale of orchids by a flower shop which raises its flowers in Tagaytay. (3%)
SUGGESTED ANSWER:
The sale of orchids is subject to VAT at 12%. This is a sale of agricultural non-food product in its original
state which is no longer one of the exempt transactions. (Sec. 109, NIRC, as amended by RA No. 9337).
2. Melissa inherited from her father a 300-square-meter lot. At the time of her father’s death on
March 14, 1995, the property was valued at P720,000.00. On February 28, 1996, to defray the cost
of the medical expenses of her sick son, she sold the lot for P600.000.00, on cash basis. The
prevailing market value of the property at the time of the sale was P3.000.00 per square meter.
Is Melissa liable to pay Value Added Tax (VAT) on the sale of the property? If so, how much and
why? If not, why not? (4%)
SUGGESTED ANSWER:
No. The real property sold, being in the nature of a capital asset, is not subject to VAT. The sale is subject to
VAT only if the real property sold is held primarily for sale to customers or held for lease in the ordinary
course of trade or business. A real property classified as a capital asset does not include a real property
held for sale or for lease, hence, its sale is not subject to VAT (Section 39 and Section 106, NIRC). (BAR
2009)
3. State whether the following transactions are a) VAT Exempt, b) subject to VAT at 10%; or c) subject
to VAT at 0%:
Sale of tractors and other agricultural implements by Bungkal Incorporated to local farmers. [1%]
SUGGESTED ANSWER:
VAT at 10%. Tractors and other agricultural implements fall under the definition of goods which include
all tangible objects which are capable of pecuniary estimation (Sec. 106[A](1), NIRC, the sales of which are
subject to VAT at 10%. (BAR 1998)
4. State whether the following transactions are a) VAT Exempt, b) subject to VAT at 10%; or c) subject
to VAT at 0%:
Sale of RIW by Cely's Boutique, a Filipino dress designer, in her dress shop and other outlets. (1%1
SUGGESTED ANSWER:
This is subject to VAT at 10%. This transaction also falls under the definition of goods which include all
tangible objects which are capable of pecuniary estimation (Sec. 106[A](1), NIRC, the sales of which are
subject to VAT at 10%. (BAR 1998)
5. What is the basis of the Value-Added Tax on taxable sales of real property?
ANSWER:
The basis of the Value-Added Tax on taxable sale of real property is “Gross Selling Price" which is either
selling price stated in the sale document or the “Zonal Value", whichever is higher. In the absence of zonal
values, the gross selling price shall refer to the market value as shown in the latest tax declaration or the
consideration, whichever is higher. (BAR 1996)
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9.

a. Requisites of taxability of sale of goods or properties
Zero-rated sales of goods or properties, and effectively zero-rated sales of goods or properties

1. Royal Mining is a VAT-registered domestic mining entity. One of its products is silver being sold to
the Bangko Sentral rig Pilipinas. It filed a claim with the BIR for tax refund on the ground that
under Section 106 of the Tax Code, sales of precious metals to the Bangko Sentral are considered
export sales subject to zero-rated VAT.
Is Royal Mining’s claim meritorious? Explain. 5%
SUGGESTED ANSWER:
No, Royal Mining's claim is not meritorious because it is the sale to the Bangko Sentral ng Pilipinas of gold
and not silver which is considered as export sale subject to zero-rated VAT (Section 106(A)(2)(a), NIRC).
Note:
There seems to be confusion as to the inclusion of the E-VA T Law in the coverage of the examination. The
first notice given during the Chairman’s meeting with the Law Deans explicitly excludes the E-VAT Law
from the coverage. The subsequent notice includes E-VAT Law but the reference to the ABAKADA Guro
case gave many bar review lecturers in Taxation the impression that only the said case is included and not
the entire EVAT Law, as it has been excluded for several years now. For the above reason, it is respectfully
recommended that any answer be given credit. (BAR 2006)
2. Colawin Marketing Corp. (CMC) sells goods and renders services to Pinatubo Inc., a contractor for
the U.S. Base. CMC applies for zero rate. Is it qualified for zero rating under the pertinent Tax Code
provisions on VAT?
ANSWER:
CMC is not qualified for zero rating. The goods and services rendered to Pinatubo, Inc.. evidently a
domestic corporation, cannot be considered as an export sale. Pinatubo Inc. is but a contractor for the U.S.
Base.
The sales which are subject to zero percent are export sales and sales to persons or entities whose
exemption under special laws or by an International Agreement where the Philippines is a signatory
effectively subjects such sales to zero rate (Sec. 100, NIRC). (BAR 1991)

10. Transactions deemed sale

1. Under the Value Added tax (VAT), the tax is imposed on sales, barter, or exchange of goods and
services. The VAT is also imposed on certain transactions "deemed-sales". What are these so-called
transactions "deemed sales'?
ANSWER:
The following transactions shall be deemed sale:
a) Transfer, use. or consumption not in the course of business of goods originally intended for sale or
for use in the course of business:
b) Distribution or transfer to:
(1) Shareholders or investors as share in the profits of VAT-registered persons: or
(2) Creditors in payment of debt:
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c) Consignment of goods if actual sale is not made within 60 days following the date such goods were
consigned: and
d) Retirement from or cessation of business, with respect to inventories of taxable goods existing as
of such retirement or cessation. (BAR 1997)
a. Transfer, use or consumption not in the course of business of goods/properties originally
intended for sale or use in the course of business
b. Distribution or transfer to shareholders, investors or creditors
c. Consignment of goods if actual sale not made within 60 days from date of consignment
d. Retirement from or cessation of business with respect to inventories on hand
11. Change or cessation of status as VAT-registered person
a. Subject to VAT
(1) Change of business activity from VAT taxable status to VAT-exempt status
(2) Approval of request for cancellation of a registration due to reversion to exempt status
(3) Approval of request for cancellation of registration due to desire to revert to exempt
status after lapse of 3 consecutive years
b. Not subject to VAT
(1) Change of control of a corporation
1. Cebu Development Inc. (CDI) has an authorized capital stock of P5,000,000,00 divided into 50,000
shares with a par value of One Hundred Pesos (P100.00) per share. Of the authorized capital stock,
twenty-five thousand (25,000) shares have been subscribed. Mr. Juan Legaspi is a stockholder of
CDI where he has subscription amounting to 13,000 shares. To fully pay his unpaid subscription in
the amount of P950.000.00, Mr. Legaspi transferred to the corporation a parcel of land that he
owns by virtue of a Deed of Assignment. Upon investigation, the BIR discovered that Mr. Legaspi
acquired said property for only P500,000.00.
Is Mr. Legaspi liable for any taxable gain?
ANSWER:
The transfer by Mr. Legaspi to the corporation of the parcel of land in payment of his unpaid subscription
did not increase his stockholdings in the corporation. It cannot be said that he acquired control of the
corporation by virtue of the transfer of the land. His percentage of stockholdings in the capital stock of the
corporation remains the same after the transfer as before. Therefore, Mr. Legaspi derived taxable gain for
his economic gain which was realized by virtue of the exchange of the land for the liability for the
subscription.
ALTERNATIVE ANSWER:
Mr. Legaspi is not liable for any taxable gain. The transaction amounted to an exchange of shares of
property for shares of stock as a result of which the property transferor acquired control of the
corporation. The 13,000 shares of stock acquired in exchange of property was more than fifty percent
(50%) of the total subscribed capital stock of Cebu Development, Inc. (CDI) that qualified the transaction
as a tax-exempt under the provisions of Sec. 34 (c) (2) of the National Internal Revenue Code. (BAR 1991)
(2) Change in the trade or corporate name
(3) Merger or consolidation of corporations
12. VAT on importation of goods
1. JKL Corporation is a domestic corporation engaged in the importation and sale of motor vehicles in
the Philippines and is duly registered with the Subic Bay Metropolitan Authority (SBMA). In
December 2007, it imported several second-hand motor vehicles from Japan and Korea, which it
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stores in a warehouse in Subic Bay. It sold these motor vehicles in April 2008, to persons residing
in the customs territory.
b) If they are taxable, upon sale to custom territory, when must the duties and taxes be paid?
What are the bases for and purposes of computing customs duties and VAT? To whom must the
duties and VAT be paid? Explain. (3%)
SUGGESTED ANSWER:
b) When these motor vehicles are sold to the customs territory, the duties and taxes must be paid before
they are physically brought out of the Freeport Zone. The introduction of the motor vehicles to the
customs territory is considered as technical importation subject to the customs duties and VAT. The
tax base for the customs duties is the transaction value while for VAT purposes, the tax base is the
value used in computing customs duties plus customs duties, excise taxes and other charges incident
to importation. (Section 107 (A), NIRC). These taxes on importation must be paid to the Bureau of
Customs before the Authority to Release Imported Goods will be issued by the BIR. (Revenue
Regulations No. 16-2005). (BAR 2008)
a. Transfer of goods by tax exempt persons
1. An alien employee of the Asian Development Bank (ADB) who is retiring soon has offered to sell
his car to you which he imported tax-free for his personal use. The privilege of exemption from tax
is granted to qualified personal use under the ADB Charter which is recognized by the tax
authorities. If you decide to purchase the car, is the sale subject to tax? Explain. (5%)
SUGGESTED ANSWER:
Yes. The sale is subject to tax. Section 107 (B) of the NIRC provides that: "In the case of tax-free
importation of goods into the Philippines by persons, entities or agencies exempt from tax where such
goods are subsequently sold, transferred or exchanged in the Philippines to non-exempt persons or
entities, the purchasers, transferees or recipients shall be considered the importer thereof, who shall be
liable for any internal revenue tax on such importation”.
Note:
The question seems to be outside the coverage of the bar examination because it involves an application of
the provision of the VAT Law. It is suggested, therefore, that any answer shall be given full credit. (BAR
2005)
13. VAT on sale of service and use or lease of properties

1. Greenhills Condominium Corporation incorporated in 2001 is a non-stock, non-profit association
of unit owners in Greenhills Tower, San Juan City. To be able to reduce the association dues being
collected from the unit owners, the Board of Directors of the corporation agreed to lease part of
the ground floor of the condominium building to DEF Savings Bank for P120,000 a month or P1.44
million for the year, starting January 2007.
b) Will the association be liable for value added tax in 2008 if it increases the rental to PI50,000 a
month beginning January 2008? Explain. (3%)
SUGGESTED ANSWERS:
b) Yes. When it increased the rentals to P150,000 per month, its gross annual receipts will now exceed
PI.5 million. It is liable to the VAT beginning January 2008. (Section 109(V), NIRC). (BAR 2008)
a. Requisites for taxability
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14. Zero-rated sale of services

1. Are the following transactions subject to VAT? If yes, what is the applicable rate for each
transaction. State the relevant authority/ies for your answer.
a. Construction by XYZ Construction Co. of concrete barriers for the Asian Development Bank in
Ortigas Center to prevent car bombs from ramming the ADB gates along ADB Avenue in
Mandaluyong City. (3%)
SUGGESTED ANSWER:
The transaction is subject to VAT at the rate of zero percent (0%). ADB is exempt from direct and indirect
taxes under a special law, thereby making the sale of services to it by a VAT-registered construction
company, effectively zero-rated (Sec. 108(B)(3), NIRC).
b. Call Center operated by a domestic enterprise in Makati that handles exclusively the
reservations of a hotel chain which are all located in North America. The services are paid for in
US$ and duly accounted for with the Bangko Sentral ng Pilipinas. (3%)
SUGGESTED ANSWER:
The sale of services is subject to VAT at zero percent (0%). Zero-rated sale of services includes services
rendered to a person engaged in business outside the Philippines and the consideration is paid in
acceptable foreign currency duly accounted for by the Bangko Sentral ng Pilipinas (Sec. 108(B)(2), NIRC).
2. State whether the following transactions are a) VAT Exempt, b) subject to VAT at 10%; or c) subject
to VAT at 0%:
Services rendered by Jake's Construction Company, a contractor to the World Health Organization
in the renovation of its offices In Manila. [1%]
SUGGESTED ANSWER:
VAT at 0%. Since Jake's Construction Company has rendered services to the World Health Organization,
which is an entity exempted from taxation under international agreements to which the Philippines is a
signatory, the supply of services is subject to zero percent (0%) rate. (Sec. 108IB](3), NIRC). (BAR 1998)
15. VAT exempt transactions

a. VAT exempt transactions, in general
b. Exempt transaction, enumerated
1. Emiliano Paupahan is engaged in the business of leasing out several residential apartment units he
owns. The monthly rental for each unit ranges from P8,000.00 to PI0,000.00. His gross rental
income for one year is PI,650,000.00. He consults you on whether it is necessary for him to register
as a VAT taxpayer. What legal advice will you give him, and why? (4%)
SUGGESTED ANSWER:
I will advise Emiliano ttyat he is not required to register as a VAT taxpayer. His transactions of leasing
residential units for an amount not exceeding P10,000.00 per unit per month are exempt from VAT
irrespective of the aggregate amount of rentals received annually (Section 109(1X0,b NIRC). (BAR 2009)
2. Greenhills Condominium Corporation incorporated in 2001 is a non-stock, non-profit association
of unit owners in Greenhills Tower, San Juan City. To be able to reduce the association dues being
collected from the unit owners, the Board of Directors of the corporation agreed to lease part of
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the ground floor of the condominium building to DEF Savings Bank for P120,000 a month or P1.44
million for the year, starting January 2007.
a) Is the non-stock, non-profit association liable for value added tax in 2007? If your answer is in
the negative, is it liable for another kind of business tax? (4%)
SUGGESTED ANSWER:
a) No. Since the association’s annual gross receipts do not exceed PI.5 million, it is exempt from the VAT.
(Section 109(V), NIRC). It is, however, liable to the 3% percentage tax which is the imposed on persons
exempt from value-added tax on account of failure to reach the P1.5 million treshhold. (Section 116,
NIRC).
b) Will the association be liable for value added tax in 2008 if it increases the rental to PI50,000 a
month beginning January 2008? Explain. (3%)
SUGGESTED ANSWERS:
b) Yes. When it increased the rentals to P150,000 per month, its gross annual receipts will now exceed
PI.5 million. It is liable to the VAT beginning January 2008. (Section 109(V), NIRC). (BAR 2008)
3. State whether the following transactions are a) VAT Exempt, b) subject to VAT at 10%; or c) subject
to VAT at 0%:
Sale of fresh vegetables by Aling Ining at the Pamilihang Bayan ng Trece Martirez. [1%]
SUGGESTED ANSWER:
VAT exempt. Sale of agricultural products, such as fresh vegetables, in their original state, of a kind
generally used as, or producing foods for human consumption is exempt from VAT. (Section 109(c), NIRC).
(BAR 1998)
4. State whether the following transactions are a) VAT Exempt, b) subject to VAT at 10%; or c) subject
to VAT at 0%:
Fees for lodging paid by students to Bahay-Bahayan Dormitory, a private entity operating a
student dormitory (monthly fee. P1,500). 11%]
SUGGESTED ANSWER:
VAT Exempt. The monthly fee paid by each student falls under the lease of residential units with a monthly
rental per unit not exceeding Php8,000, which is exempt from VAT regardless of the amount of aggregate
rentals received by the lessor during the year. (Sec. 109 (x), NIRC). The term unit shall mean per person in
the case of dormitories, boarding houses and bed spaces (Sec. 4.103-1, RR No. 7-95). (BAR 1998)
5. Give at least three (3) real estate transactions which are not subject to the Value-Added Tax.
ANSWER:
Real estate transactions which are exempt from the value-added tax are:
a. Sale of real property not primarily held for sale or lease In the ordinary course of trade or
business;
b. Sale of real property utilized for socialized housing under RA. No. 7279;
c. Sale of real property utilized under the low-cost housing under BP Big. 220.
Note:
The other real estate transactions which are exempt from the value-added tax which may be cited by the
bar candidates are as follows:
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a. Transfer of real property to a trustee if the property is to be held merely in trust for the trustor.
b. Transfer of real property to a corporation in exchange for its shares of stock under Section
34(c)(2) and (6)(2) of the Tax Code.
c. Advance payment by the lessee in a lease contract, when the same is actually a loan to the lessor
from the lessee.
d. Security deposits for lease arrangements to insure the faithful performance of certain obligations
of the lessee to the lessor.
e. Lease of residential units, boarding houses, dormitories, rooms and bed spaces offered for rent by
their owners at a monthly rental not exceeding P3.950.00 per unit. (BAR 1996)
16. Input tax and output tax, defined
17. Sources of input tax

18.
19.

20.
21.

22.

23.
24.

a. Purchase or importation of goods
b. Purchase of real properties for which a VAT has actually been paid
c. Purchase of services in which VAT has actually been paid
d. Transactions deemed sale
e. Presumptive input
f. Transitional input
Persons who can avail of input tax credit
Determination of output/input tax; VAT payable; excess input tax credits
a. Determination of output tax
b. Determination of input tax creditable
c. Allocation of input tax on mixed transactions
d. Determination of the output tax and VAT payable and computation of VAT payable or excess
tax credits
Substantiation of input tax credits
Refund or tax credit of excess input tax
a. Who may claim for refund/apply for issuance of tax credit certificate
b. Period to file claim/apply for issuance of tax credit certificate
c. Manner of giving refund
d. Destination principle or cross-border doctrine
Invoicing requirements
a. Invoicing requirements in general
b. Invoicing and recording deemed sale transactions
c. Consequences of issuing erroneous VAT invoice or VAT official receipt
Filing of return and payment
Withholding of final VAT on sales to government

E. Tax remedies under the NIRC
1. Taxpayer’s remedies
1. Describe separately the procedures on the legal remedies under the Tax Code available to an
aggrieved taxpayer both at the administrative and judicial levels. (5%)
SUGGESTED ANSWER:
The legal remedies of an aggrieved taxpayer under the Tax Code, both at the administrative and judicial
levels, may be classified into those for assessment, collection and refund.
The procedures for the administrative remedies for assessment are as follows:
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a. After receipt of the Pre-Assessment Notice, he must within fifteen (15) days from receipt explain
why no additional taxes should be assessed against him.
b. If the Commissioner of Internal Revenue Issues an assessment notice, the taxpayer must
administratively protest or dispute the assessment by filing a motion for reconsideration or
reinvestigation within thirty (30) days from receipt of the notice of assessment. (4th par., Sec. 228,
NIRC of 1997)
Within sixty (60) days from filing of the protest, the taxpayer shall submit all relevant supporting
documents.
The judicial remedies of an aggrieved taxpayer relative to an assessment notice are as follows:
a. Where the Commissioner of Internal Revenue has not acted on the taxpayer’s protest within a
period of one hundred eighty (180) days from submission of all relevant documents, then the
taxpayer has a period of thirty (30) days from the lapse of said 180 days within which to interpose
a petition for review with the Court of Tax Appeals.
b. Should the Commissioner deny the taxpayer's protest, then he has a period of thirty (30) days
from receipt of said denial within which to interpose a petition for review with the Court of Tax
Appeals.
In both cases the taxpayer must apply with the Court of Tax Appeals for the issuance of an injunctive writ
to enjoin the Bureau of Internal Revenue from collecting the disputed tax during the pendency of the
proceedings.
The adverse decision of the Court of Tax Appeals is appealable to the Court of Appeals by means of a
petition for certiorari within a period of fifteen (15) days from receipt of the adverse decision, extendible
for another period of fifteen (15) days for compelling reasons, but the extension is not to exceed a total of
thirty (30) days in all.
The adverse decision of the Court of Appeals is appealable to the Supreme Court by means of a petition for
review on certiorari within a period of fifteen (15) days from receipt of the adverse decision of the Court
of Appeals.
The employment by the Bureau of Internal Revenue of any of the administrative remedies for the
collection of the tax like distraint, levy, etc. may be administratively appealed by the taxpayer to the
Commissioner whose decision is appealable to the Court of Tax Appeals under other matter arising under
the provisions of the National Internal Revenue Code. The judicial appeal starts with the Court of Tax
Appeals, and continues in the same manner as shown above.
Should the Bureau of Internal Revenue decide to utilize Its judicial tax remedies for collecting the taxes by
means of an ordinary suit filed with the regular courts for the collection of a sum of money, the taxpayer
could oppose the same going up the ladder of judicial processes from the Municipal Trial Court (as the
case may be) to the Regional Trial Court, to the Court of Appeals, thence to the Supreme Court.
The remedy of an aggrieved taxpayer on a claim for refund is to appeal the adverse decision of the
Commissioner to the CTA in the same manner outlined above. (BAR 2000)
2. What are the legal remedies of an aggrieved taxpayer both at the administrative and judicial
levels? Describe separately the procedures.
ANSWER:
a) The administrative and judicial remedies are such as may be provided for in law imposing the tax. An
expression of such remedies in the law should then be deemed exclusive by the taxpayer. When the
law imposing the tax is silent on remedies, the laws and rules of procedure of general application shall
Page | 162

then govern.
b) Under the NIRC, an aggrieved taxpayer may either (1) dispute an assessment within thirty (30) days

from receipt thereof by filing with the Commissioner of Internal Revenue a request for
reconsideration of reinvestigation, or (2) pay the assessment within the thirty days then file a written
claim with the Commissioner of Internal Revenue for refund within two years from full and final
payment.

Upon an adverse decision of the Commissioner and within thirty days from receipt of notice of denial, an
appeal may be filed with the Court of Tax Appeals. However, with respect to claims for refunds, an appeal
must also be filed within two years from the date of full and final payment.
From the decision of the Court of Tax Appeals, an appeal or petition for review by certiorari may be taken
to the Court of Appeals and then to the Supreme Court in appropriate cases. (BAR 1992)
a. Assessment
(1) Concept of assessment
1. After examining the books and records of EDS Corporation, the 2004 final assessment notice,
showing basic tax of PI ,000,000., deficiency interest of P400,000, and due date for payment of
April 30, 2007 but without the demand letter, was mailed and released by the BIR on April 15,
2007. The registered letter, containing the tax assessment, was received by the EDS Corporation on
April 25, 2007.
a) What is an assessment notice?
SUGGESTED ANSWER:
a) An assessment notice is a formal notice to the taxpayer stating that the amount thereon is due as a tax
and containing a demand for the payment thereof. {Alhambra Cigar and Cigarette Mfg. Co.v. Collector,
10S PR 1337[1959]; CIR v. Pascor Realty and Development Corp., 309 SCRA 402 [1999]). To be valid,
the taxpayer must be informed in writing of the law and the facts on which the assessment is made.
(Section 228, NIRC). (BAR 2008)
2. Distinguish between a taxpayer’s remedies in connection with his tax assessment and/or demand
and his claim for refund of taxes alleged to have been erroneously or illegally collected.
ANSWER:
A tax assessment becomes final unless it is disputed or contested within 30 days from receipt thereof by
the taxpayer. If the action taken by the Commissioner on the request for reconsideration is unacceptable
to the taxpayer, the latter must then appeal, by way of Petition for Review to the Court of Tax Appeals
within thirty days from receipt of the decision of the Commissioner of Internal Revenue. The taxpayer
may also opt to pay the tax before the finality of the assessment (e.g., within 30 days from receipt of the
assessment) and then file within two years a written claim for the refund of the tax. A denial by the
Commissioner of a claim for refund must be appealed to the CTA within thirty days from receipt of notice
of denial and within two years from the day of full and final payment. Continued inaction by the
Commissioner on claims for refund may thus be taken as a denial appealable to the Court of Tax Appeals,
in order to permit the appeal to be considered or having been made within the two-year mandatory
period. (BAR 1992)
(i) Requisites for valid assessment
1. After examining the books and records of EDS Corporation, the 2004 final assessment notice,
showing basic tax of PI ,000,000., deficiency interest of P400,000, and due date for payment of
April 30, 2007 but without the demand letter, was mailed and released by the BIR on April 15,
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2007. The registered letter, containing the tax assessment, was received by the EDS Corporation on
April 25, 2007.
a) What are the requisites of a valid assessment? Explain. (3%)
SUGGESTED ANSWER:
a) An assessment is a written notice and demand made by the Bureau on the taxpayer for the settlement of
a tax liability that is due, definitely set and fixed therein. The requisites of a valid assessment are:
1.

It must be made within the prescriptive period to assess; (Section 203, NIRC)

2.

There must be a preliminary assessment previously issued, except in those instances allowed
by law; (Section 228, NIRC)

3.

The taxpayer must be informed in writing about the law and facts on which the assessment is
based; (Section 228, NIRC) and

4.

It must be served upon the taxpayer or any of his authorized representatives. (Estate of
Juliana Diez vda. De Gabriel v. CIR, 421 SCRA 266[2004]).

b) As tax lawyer of EDS Corporation, what legal defense(s) would you raise against the assessment?
Explain. (3%)
SUGGESTED ANSWER:
b) I will question the validity of the assessment because of the failure to send the demand letter which
contains a statement of the law and the facts upon which the assessment is based. If an assessment
notice is sent without informing the taxpayer in writing about the law and facts on which the
assessment is made, the assessment is void. (Section 228, NIRC; Azucena T. Reyes v. CIR, 480 SCRA 382
[2006]). (BAR 2008)
(ii)
(iii)
(iv)
(v)

Constructive methods of income determination
Inventory method for income determination
Jeopardy assessment
Tax delinquency and tax deficiency

1. Is a deficiency tax assessment a bar to a claim for tax refund or tax credit? Explain.
SUGGESTED ANSWER:
No. As a general rule, a deficiency tax assessment is not a bar to a claim for tax refund or tax credit. It is
logically appropriate; however, that if the deficiency tax assessment is already final, the Commissioner
should not grant the claim unless the taxpayer pays the deficiency. Likewise, no tax refund or tax credit
will be granted as long as there is pending a deficiency tax assessment for the same taxable period. To
award a tax refund or tax credit despite the existence of deficiency assessment for the same taxable period
is an absurdity and a polarity in conceptual effects. A taxpayer cannot be entitled to a refund and at the
same time be liable for a tax deficiency assessment. In order to avoid multiplicity of suits, it is logically
necessary and legally appropriate that the issue of deficiency tax assessment be resolved jointly with the
taxpayer’s claim for tax refund, to determine once and for all in a single proceeding the true and correct
amount of tax due or refundable. [CIR v. CA, City trust Banking Corp. and CTA, 234 SCRA 348 (1994)].
(BAR 2005)
2. Danilo, who is engaged in the trading business, entrusted to his accountant the preparation of his
income tax return and the payment of the tax due. The accountant filed a falsified tax return by
underdeclaring the sales and overstating the expense deductions by Danilo.
Page | 164

Is Danilo liable for the deficiency tax and the penalties thereon? What is the liability, if any, of the
accountant? Discuss. (5%)
SUGGESTED ANSWER:
Yes, Danilo is liable for the deficiency tax as well as for the deficiency interest. However, he is not liable to
the fraud penalty because the accountant acted beyond the limits of his authority. A tax return which does
not correctly reflect taxable income may only be false but not necessarily fraudulent where it appears that
the return was not prepared by the taxpayer himself but by his accountant. Accordingly, the 50%
surcharge for fraud could not be imposed. [Aznar v. CTA, 58 SCRA 719, (1974)].
On the other hand, the accountant may be held criminally liable for violation of the Tax Code when he
falsified the tax return by underdeclaring the sale and overstating the expense deductions. (Sec. 257,
NIRC). If Danny's accountant is a Certified Public Accountant, his certificate as CPA shall automatically be
revoked or cancelled upon conviction. (BAR 2005)
3. When is a revenue tax considered delinquent? [3%I
What constitutes prima facie evidence of a false or fraudulent return? [2%]
SUGGESTED ANSWER:
A revenue tax is considered delinquent when it is unpaid after the lapse of the last day prescribed by law
for its payment. Likewise, it could also be considered as delinquent where an assessment for deficiency tax
has become final and the taxpayer has not paid it within the period given in the notice of assessment. (BAR
1998)
4. Mr. Lajojo is a big-time swindler. In one year he was able to earn PI Million from his swindling
activities. When the Commissioner of Internal Revenue discovered his income from swindling, the
Commissioner assessed him a deficiency income tax for such income.
The lawyer of Mr. Lajojo protested the assessment on the following grounds:
If he has to pay the deficiency income tax assessment, there will be hardly anything left to return to
the victims of the swindling.
How will you rule on each of the three grounds for the protest? Explain.
ANSWER:
The deficiency income tax assessment is a direct tax imposed on the owner which is an excise on the
privilege to earn an income. It will not necessarily be paid out of the same income that were subjected to
the tax. Mr. Lajojo’s liability to pay the tax is based on his having realized a taxable income from his
swindling activities and will not affect his obligation to make restitution. Payment of the tax is a civil
obligation imposed by law while restitution is a civil liability arising from a crime. (BAR 1995)
5. Businessman Stephen Yang filed an Income tax return for 1993 showing business net income of
P350.000.00 on which he paid an income tax of P61,000.00. After filing the return he realized that
he forgot to include an item of business income in 1993 for P50.000.00. Being an honest taxpayer,
he included this income in his return for 1994 and paid the corresponding income tax thereon.
In the examination of his 1993 return the BIR examiner found that Stephen Yang failed to report
this item of P50.000.00 and assessed him a deficiency income tax on this item, plus a 50% fraud
surcharge.
1) Is the examiner correct? Explain.
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2) If you were the lawyer of Stephen Yang, what would you have advised your client before he
included in his 1994 return the amount of P50.000.00 as 1993 income to avoid the fraud
surcharge? Explain.
3) Considering that Stephen Yang had already been assessed a deficiency income tax for 1993 for
his failure to report the P50,000.00 income, what would you advise him to do to avoid the
penalties for tax delinquency? Explain.
4) What would you advise Stephen Yang to do with regard to the income tax he paid for the
P50,000.00 in his 1994 return? In case your remedy fails, what is your other recourse? Explain.
ANSWER:
1) The examiner is correct in assessing a deficiency income tax for taxable year 1993 but not in imposing
the 50% fraud surcharge. The amount of all items of gross income must be included in gross income
during the year in which received or realized (Sec. 38, NIRC). The 50% fraud surcharge attaches only if
a false or fraudulent return is willfully made by Mr. Yang (Sec.248.NIRC). The fact that Mr. Yang
included the income in his 1994 return belies any claim of willfulness but is rather indicative of an
honest mistake which was sought to be rectified by a subsequent act that is the filing of the 1994
return.
2) Mr. Yang should have amended his 1993 Income tax return to allow for the inclusion of the P50.000
income during the taxable period it was realized.
3) Mr. Yang should pay the deficiency income tax on or before the day prescribed for its payment per
notice of demand. After payment and within two years thereafter, he should file a claim for refund of
taxes erroneously paid to recover the excessive surcharge imposed.
4) Mr. Yang should file a protest questioning the 50% surcharge and ask for the abatement thereof.
ALTERNATIVE ANSWER:
4) Mr. Yang should file a written claim for refund with the Commissioner of Internal Revenue of the taxes
paid on the P50.000 income included in 1994 within two years from payment pursuant to Section
204(3) of the Tax Code. Should this remedy fail in the administrative level, a judicial claim for refund
can be instituted before the expiration of the two year period. (BAR 1995)
6. Do you think an action for mandamus with the RTC can prosper to compel the Commissioner to
issue a deficiency assessment?
ANSWER:
No. It has been held that the assessment of taxes is not a ministerial duty compellable by mandamus. It is a
discretionary power vested by law on the Commissioner of Internal Revenue in the exercise of which the
regular courts may not interfere with. (BAR 1992)
(2) Power of the Commissioner to make assessments and prescribe additional requirements
for tax administration and enforcement
(i) Power of the Commissioner to obtain information, and to summon/examine, and
take testimony of persons
1. X dies in year 2000 leaving a bank deposit of P2, 000,000.00 under joint account with his
associates in a law office. Learning of X’s death from the newspapers, the Commissioner of Internal
Revenue wrote to every bank in the country asking them to disclose to him the amount of deposits
that might be outstanding in his name or jointly with others at the date of his death. May the bank
holding the deposit refuse to comply on the ground of the Secrecy of Bank Deposit Law? Explain.
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SUGGESTED ANSWER:
No. The Commissioner of Internal Revenue has the authority to inquire into bank deposit accounts of a
decedent to determine his gross estate notwithstanding the provisions of the Bank Secrecy Law. Hence,
the banks holding the deposits in question may not refuse to disclose the amount of deposits on the
ground of secrecy of bank deposits. (Section 6(F) of the 1997 Tax Code). The fact that the deposit is a joint
account will not preclude the Commissioner from inquiring thereon because the law mandates that if a
bank has knowledge of the death-of a person, who maintained a bank deposit account alone, or jointly
with another, it shall not allow any withdrawal from the said deposit account, unless the Commissioner
has certified that the taxes imposed thereon have been paid. (Section 97 of the 1997 Tax Code). Hence, to
be able to give the required certification, the inclusion of the deposit is imperative, which may be made
possible only through the inquiry made by the Commissioner. (BAR 2003)
2. A taxpayer is suspected not to have declared his correct gross income in his return filed for 1997.
The examiner requested the Commissioner to authorize him to inquire into the bank deposits of
the taxpayer so that he could proceed with the net worth method of investigation to establish
fraud. May the examiner be allowed to look into the taxpayer’s bank deposits? In what cases may
the Commissioner or his duly authorized representative be allowed to Inquire or look into the
bank deposits of a taxpayer? (5%)
SUGGESTED ANSWER:
No, as this would be violative of Republic Act No. 1405, the Bank Deposits Secrecy Law.
The Commissioner of Internal Revenue or his duly authorized representative may be allowed to inquire or
look into the bank deposits of a taxpayer in the following cases:
a) For the purpose of determining the gross estate of a decedent;
b) Where the taxpayer has filed an application for compromise of his tax liability by reason of
financial incapacity to pay such tax liability. [Sec. 6 (F), NIRC of 1997]
c) Where the taxpayer has signed a waiver authorizing the Commissioner or his duly authorized
representatives to inquire into the bank deposits. (BAR 2000)
3. A Co., a Philippine corporation, is a big manufacturer of consumer goods and has several suppliers
of raw materials. The BIR suspects that some of the suppliers are not properly reporting their
income on their sales to A Co. The CIR therefore:
1. Issued an access letter to A Co. to furnish the BIR information on sales and payments to its
suppliers.
2. Issued an access letter to a bank (CX Bank) to furnish the BIR on deposits of some suppliers
of A Co. on the alleged ground that the suppliers are committing tax evasion.
A Co., X Bank and the suppliers have not been issued by the BIR letter of authority to examine. A Co.
and X Bank believe that the BIR is on a “fishing expedition" and come to you for counsel. What is
your advice? (10%)
SUGGESTED ANSWER:
I will advise A Co. and B Co. that the BER is justified only in getting information from the former but not
from the latter. The BIR is authorized to obtain information from other persons other than those whose
internal revenue tax liability is subject to audit or investigation. However, this power shall not be
construed as granting the Commissioner the authority to inquire into bank deposits. (Section 5, NIRC).
(BAR 1999)

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4. Can the Commissioner of Internal Revenue inquire into the bank deposits of a taxpayer? If so, does
this power of the Commissioner conflict with FLA. 1405 (Secrecy of Bank Deposits Law) [5%]
SUGGESTED ANSWER:
The Commissioner of Internal Revenue is authorized to inquire into the bank deposits of:
(1) a decedent to determine his gross estate;
(2) any taxpayer who has filed an application for compromise of his tax liability by means of financial
Incapacity to pay his tax liability (Sec. 6(F), NIRC).
The limited power of the Commissioner does not conflict with R.A. No. 1405 because the provisions of the
Tax Code granting this power is an exception to the Secrecy of Bank Deposits Law as embodied in a later
legislation.
Furthermore, in case a taxpayer applies for an application to compromise the payment of his tax liabilities
on his claim that his financial position demonstrates a clear inability to pay the tax assessed, his
application shall not be considered unless and until he waives in writing his privilege under R.A. No. 1405,
and such waiver shall constitute the authority of the Commissioner to inquire into the bank deposits of the
taxpayer. (BAR 1998)
(3) When assessment is made
(i) Prescriptive period for assessment
1. The Commissioner of Internal Revenue issued an assessment for deficiency income tax for taxable
year 2000 last July 31, 2006 in the amount of P10 Million inclusive of surcharge and interests. If
the delinquent taxpayer is your client, what steps will you take? What is your defense? 10%
SUGGESTED ANSWER:
Since my client has already lost his right to protest the assessment having been issued on July 31, 2006
and that he is already categorized as a delinquent tax payer. I will advise him to wait for a collection action
to be instituted by the commissioner. Once colletion is pursued. I will file a petition for review with the
CTA to question the validity of the commissioner’s action. My defense would be prescription. Since the
assessment was issued beyond the prescriptive period to assess, the assessment is invalid and any action
to collect an invalid assessment is not warranted (Phil. Journalists, Inc. v. CIR, 447 SCRA 214 [2004])
ANOTHER SUGGESTED ANSWER:
I will advise my client, who is a delinquent taxpayer, to file a request with the Commissioner of Internal
Revenue for the abatement of the entire assessment on the ground that the same is unjustly assessed (Sec,
204, NIRC), I will invoke prescription as a defense against the assessment. I will tell the Commissioner that
the assessment having been issued beyond the prescriptive period, the deficiency income tax would
appear to be unjustly assessed which would justify the abatement or cancellation of the entire assessment.
ANOTHER SUGGESTED ANSWER:
I will immediately file a protest within thirty (30) days from receipt of the assessment by my client
addressed to the Commissioner of Internal Revenue, alleging prescription as my defense because the
assessment was issued beyond three (3) years as required by law (Sec. 228 and 203, NIRC).
Should the Commissioner deny my protest, I will file an appeal to the Court of Tax Appeals (CTA) within
thirty (30) days from receipt of the decision (Sec. 228, NIRC).
Should the CTA Division deny my petition for review, I will file a Motion for Reconsideration within 15
days from receipt of the denial. Should the Division deny my Motion for Reconsideration, I will appeal to
the CTA en banc and from the latter’s denial, I will appeal to the Supreme Court by way of a petition for
certiorari within 15 days from receipt of the en banc decision. (BAR 2006)
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2. 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 for 1997 on March 15.1998. After an audit of the 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.
Decide Mr. Castro’s protest. (2%)
SUGGESTED ANSWER:
The protest should be resolved against Mr. Castro. What was filed is a fraudulent return making the
prescriptive period for assessment ten (10) years from discovery of the fraud (Section 222, NIRC).
Accordingly, the assessment was issued within the prescriptive period to make an assessment based on a
fraudulent return.
If you are the lawyer of Mr. and Mrs. Sebastian, what possible defense or defenses will you raise in
behalf of your clients against the action of the BIR in enforcing collection of the tax by the summary
remedies of warrants of distraint and levy? Explain your answer. (3%)
SUGGESTED ANSWER:
I will raise the defense of prescription. The right of the BIR to assess prescribes after three years counted
from the last day prescribed by law for the filing of the income tax returns when the said return is filed on
time. (Section 203, NIRC). The last day for filing the 1997 income tax return is April 15,1998. Since the
assessment was issued only on April 20, 2001, the BIR’s right to assess has already prescribed. (BAR
2002)
3. A Co., a Philippine Corporation, filed its 1995 Income Tax Return (ITR) on April 15, 1996, showing
a net loss. On November 10. 1996, it amended its 1995 ITR to show more losses. After a tax
investigation, the BIR disallowed certain deductions claimed by A Co., putting A Co. in a net income
position. As a result, on August 5, 1999, the BIR issued a deficiency income assessment against A
Co. A Co. protested the assessment on the ground that it has prescribed: Decide. (5%)
SUGGESTED ANSWER:
The right of the BIR to assess the tax has not prescribed. The rule is that internal revenue taxes shall be
assessed within three years after the last day prescribed by law for the filing of the return. (Section 203,
NIRC). However, if the return originally filed is amended substantially, the counting of the three-year
period starts from the date the amended return was filed. (CIR v. Phoenix Assurance Co., Ltd., 14 SCRA 52).
There is a substantial amendment in this case because a new return was filed declaring more losses, which
can only be done either (1) in reducing gross income or (2) in increasing the items of deductions, claimed.
(BAR 1999)
4. Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules
that have been adopted on this score by –
(a) The National Internal Revenue Code;
SUGGESTED ANSWER:
The rules that have been adopted on prescription are as follows:
(a) National Internal Revenue Code - The statute of limitation for assessment of tax if a return is filed
is within three (3) years from the last day prescribed by law for the filing of the return or if filed
after the last day, within three years from date of actual filing. If no return is filed or the return
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filed is false or fraudulent, the period to assess is within ten years from discovery of the omission,
fraud or falsity. (BAR 1997)
5. On September 19, 1973, the BIR sent a notice of assessment to X to pay P300.000.00 as forest
charges for the year 1970-73. Xmade a partial payment of P100.000.00 on September 28,1973. X
died in November, 1977. On July 29, 1979, the BIR filed in the Testate Estate Proceedings of X a
claim for P200.000.00the unpaid forest charges left by X. the administrator of the estate opposed
the claim on the ground of prescription. Decide.
ANSWER:
Where assessment was made, the tax may be collected within five (5) years (now 3 years) from the date of
assessment [Coflection of Internal Revenue v. Pineda, 2 SCRA 401; Umali, Roman A., Reviewer in Taxation,
1985. pp. 486-487; Vitug, JoseC., Compendium of Tax Law and Jurisprudence, 2nd Rev., Ed.. 1986, p. 255).
In the case at bar, X on the basis of the notice of assessment, voluntarily made a partial payment to the
Bureau of Internal Revenue in the amount of One Hundred Thousand Pesos (P100,000.00). However, it
took the BIR almost more than five (5) years to take the necessary legal action to collect the remaining
amount of taxes due.
This is clearly beyond the five (5) now three (3) year period for the collection of taxes. Hence, the claim
filed by the BIR against the Estate of X for the payment of Two Hundred Thousand Pesos (P200.000.00)
has prescribed.
ALTERNATIVE ANSWERS:
a) The claim has prescribed as the BIR has only three (3) years from the date of the assessment to collect.
b) Taxes are money claims that must be filed with the probate court within the period provided for in the

Rules of Court (Sections 1 and 2. Rule 86). In the case of Domingo v. Garlttos (8 SCRA 443), the court
ruled that the claims shall be barred if filed beyond the prescribed period Just like any other money
claims. But the ruling in Garlitos was superseded by Vera v. Fernandez which ruled that estate taxes
are payable even if presented beyond the period in the statute of non-claims in the Rules of Court.
(BAR 1993)
a) False, fraudulent, and non-filing of returns
1. A false return and a fraudulent return are one and the same.
SUGGESTED ANSWER:
False. There is a difference between a false return and a fraudulent return. The first merely implies a
deviation from the truth or fact whether intentional or not, whereas the second is intentional and deceitful
with the aim of evading the correct tax due (Aznar v. Commissioner, GR No. L-20569, August 23, 1974, 58
SCRA S19[1974]). (BAR 2009)
2. What constitutes prima facie evidence of a false or fraudulent return to justify the imposition of a
50% surcharge on the deficiency tax due from a taxpayer? Explain. (5%)
SUGGESTED ANSWER:
There is a prima facie evidence of false or fraudulent return when the taxpayer substantially
underdeclared his taxable sales, receipts or income, or substantially overstated his deductions, the
taxpayer’s failure to report sales, receipts or income in an amount exceeding 30% of that declared per
return, and a claim of deduction in an amount exceeding 30% of actual deduction shall render the
taxpayer liable for substantial underdeclaration and overdeclaration, respectively, and will justify the
imposition of the 50% surcharge on the deficiency tax due from the taxpayer. (Sec. 248, NIRC). (BAR
2002)
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3. What constitutes prima facie evidence of a false or fraudulent return? [2%]
SUGGESTED ANSWER:
There is prima facie evidence of a false or fraudulent return when the taxpayer has wilfully and knowingly
filed it with the intent to evade a part or all of the tax legally due from him (Ungab v. Cusi, 97 SCRA 877).
There must appear a design to mislead or deceive on the part of the taxpayer, or at least culpable
negligence. A mistake, not culpable in respect of its value would not constitute a false return. (Words and
Phrases, Vol 16, page 173). (BAR 1998)
4. Distinguish a false return from a fraudulent return.
ANSWER:
The distinction between a false return and a fraudulent return is that the first merely implies a deviation
from the truth or fact whether intentional or not, whereas the second is intentional and deceitful with the
sole aim of evading the correct tax due [Aznar vs. Commissioner, L-20569. August 23, 1974).
ALTERNATIVE ANSWER:
A false return contains deviations from the truth which may be due to mistakes, carelessness or ignorance
of the person preparing the return. A fraudulent return contains an intentional wrongdoing with the sole
object of avoiding the tax and it may consist in the intentional under declaration of income, intentional
over declaration of deductions or the recurrence of both. A false return is not necessarily tainted with
fraud because the fraud contemplated by law is actual and not constructive. Any deviation from the truth
on the other hand, whether intentional or not, constitutes falsity. [Aznar vs. Commissioner, L-20569,
August 23, 1974) (BAR 1996)
(ii) Suspension of running of statute of limitations
1. What is the effect of the execution by a taxpayer of a “waiver of the statute of limitations” on his
defense of prescription? (2%)
SUGGESTED ANSWER:
The waiver of the statute of limitation executed by a taxpayer is not a waiver of the right to invoke the
defense of prescription. The waiver of the statute of limitation is merely an agreement in writing between
the taxpayer and the BIR that the period to assess and collect taxes due is extended to a date certain. If
prescription has already set in at the time of the execution of the waiver is invalid, the taxpayer can still
raise prescription as a defense (Phil. Journalists Inc., v. CIR, GR No. 162852, Dec. 16, 2004)
2. A Co., a Philippine Corporation, filed its 1995 Income Tax Return (ITR) on April 15, 1996, showing
a net loss. On November 10. 1996, it amended its 1995 ITR to show more losses. After a tax
investigation, the BIR disallowed certain deductions claimed by A Co., putting A Co. in a net income
position. As a result, on August 5, 1999, the BIR issued a deficiency income assessment against A
Co. A Co. protested the assessment on the ground that it has prescribed: Decide. (5%)
SUGGESTED ANSWER:
The right of the BIR to assess the tax has not prescribed. The rule is that internal revenue taxes shall be
assessed within three years after the last day prescribed by law for the filing of the return. (Section 203,
NIRC). However, if the return originally filed is amended substantially, the counting of the three-year
period starts from the date the amended return was filed. (CIR v. Phoenix Assurance Co., Ltd., 14 SCRA 52).
There is a substantial amendment in this case because a new return was filed declaring more losses, which
can only be done either (1) in reducing gross income or (2) in increasing the items of deductions, claimed.
(BAR 1999)
3. Antonio Cruz was appointed by the Regional Trial Court as Administrator in the testate
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proceedings for the settlement of the estate of his deceased father. On 12 February 1987, the
Commissioner of Internal Revenue issued a deficiency estate tax assessment for the estate in
question in the amount of P2.816,514.60. The notice of deficiency assessment was received by
the Administrator on 19 February 1987. In his letter to the Commissioner, dated 21 February
1987, which was received by the latter’s office two (2) days later, the Administrator requested
for a reconsideration of the assessment on the ground that the same is contrary to law and is not
supported by sufficient evidence. He also requested for a period of fifteen (15) days within
which to submit the estate’s position paper.
On 4 August 1988, not having received the promise position paper, the Commissioner filed with
the Court a motion for allowance of claim and for an order of payment of estate taxes, praying
therein that the administrator be directed to pay the BIR the aforementioned deficiency tax. The
Administrator opposed the motion alleging that by reasons of the pendency of his request for
reconsideration, the deficiency assessment has not become final and executory and, therefore,
the absence of a decision on the disputed' assessment is a bar against collection of taxes. He
further argued that it is the Court of Tax Appeals, and not the Regional Trial Court, which has
exclusive jurisdiction over the claim.
Resolve the motion and issues raised.
ANSWER:
Evidently, the request for reconsideration did not express or specify the grounds therefor. A request
for reconsideration in the tenor stated in the problem is insufficient, not being substantiatied, to stop
the running of the 30-day period within which the assessment may be disputed (Dayrit vs. Cruz, G.R
No. 39919, 26 September 1988). The failure of the taxpayer to submit the promised position paper
within the said 30-day period had the effect of rendering the assessment final and executory. In
addition, the pendency of a decision on a disputed assessment does not bar the collection of the NIRC
taxes, and no injunction maybe issued by any court (except by the Court of Tax Appeals as an incident
to a timely petition for review). In the absence of a petition for review with the Court of Tax Appeals
which may be brought by a taxpayer within thirty (30) days from the receipt of the final decision of the
Commissioner, the Court of Tax Appeals has no jurisdiction to take cognizance thereof (See Sec. 11, RA.
1125). Premises considered, the action taken by the Commissioner with the Regional Trial Court was
appropriate and in accordance with law.
ALTERNATIVE ANSWER:
Once a request for reconsideration is made by the taxpayer on an assessment of the BIR within 30 days
from receipt thereof, the Commissioner is bound to make a decision thereon. That decision is the one
appealable to the Court of Tax Appeals. But if the taxpayer does not appeal within the 30-day period,
the assessment becomes final and executory and demandable. The implication of this new provision in
the NIRC is that the Commissioner cannot collect the tax as long as the taxpayer has still the right to
appeal from the Commissioner’s action. (BAR 1991)
(4) General provisions on additions to the tax
(i) Civil penalties
1. What constitutes prima facie evidence of a false or fraudulent return to justify the imposition of a
50% surcharge on the deficiency tax due from a taxpayer? Explain. (5%)
SUGGESTED ANSWER:
There is a prima facie evidence of false or fraudulent return when the taxpayer substantially
underdeclared his taxable sales, receipts or income, or substantially overstated his deductions, the
taxpayer’s failure to report sales, receipts or income in an amount exceeding 30% of that declared per
return, and a claim of deduction in an amount exceeding 30% of actual deduction shall render the
taxpayer liable for substantial underdeclaration and overdeclaration, respectively, and will justify the
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imposition of the 50% surcharge on the deficiency tax due from the taxpayer. (Sec. 248, NIRC). (BAR
2002)
(ii) Interest
(iii) Compromise penalties
1. A domestic corporation failed to withhold and remit the tax on income received from Philippine
sources by a nonresident foreign corporation. In addition to the civil penalties provided for under
the Tax Code, a compromise penalty was imposed for violation of the withholding tax provisions.
May the Commissioner of Internal Revenue legally enforce the collection of compromise penalty?
(5%)
SUGGESTED ANSWER:
No. There is no showing that the compromise penalty was imposed by the Commissioner of Internal
Revenue with the agreement and conformity of the taxpayer. (Wonder Mechanical Engineering
Corporation v. Court of Tax Appeals, et al. 64 SCRA 555). (BAR 2000)
(5) Assessment process
(i) Tax audit
(ii) Notice of informal conference
(iii) Issuance of preliminary assessment notice
(iv) Notice of informal conference
(v) Issuance of preliminary assessment notice
(vi) Exceptions to issuance of preliminary assessment notice
(vii) Reply to preliminary assessment notice
(viii) Issuance of formal letter of demand and assessment notice/final assessment
notice
1. Minolta Philippines, Inc. (Minolta) is an EPZA-registered enterprise enjoying preferential tax
treatment under a special law. After investigation of its withholding tax returns for the taxable
year 1997, the BIR issued a deficiency withholding tax assessment in the amount of P150,000.00.
On May 15, 1999, because of financial difficulty, the deficiency tax remained unpaid, as a result of
which the assessment became final and executory. The BIR also found that, in violation of the
provisions of the National Internal Revenue Code, Minolta did not file its final corporate income tax
return for the taxable year 1998, because it allegedly incurred net toss from its operations. On May
17, 2002, the BIR filed with the Regional Trial Court an action for collection of the deficiency
withholding tax for 1997.
Will the BIR’s action for collection prosper? As counsel of Minolta, what action will you take?
Explain your answer. (5%)
SUGGESTED ANSWER:
Yes, BIR’s action for collection will prosper because the assessment is already final and executory. It can
already be enforced through judicial action.
As counsel of Minolta, I will introduce evidence that the income payment was reported by the payee and
the income tax was paid thereon in 1997 so that my client may only be allowed to pay the civil penalties
for non-withholding pursuant to RMO No. 38-83.
[Note: It is not clear whether this is a case of non-withholding/ underwithholding or non-remittance of tax
withheld. As such, the tax counsel may be open to other remedies against the assessment] (BAR 2002)

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(ix) Disputed assessment
1. Which court acts on: disputed assessments?
ANSWER:
The CTA exercises exclusive appellate Jurisdiction over disputed assessments. (BAR 1992)
(x) Administrative decision on a disputed assessment
1. Pursuant to the National Internal Revenue Code and under existing rules and regulations, the
Commissioner of Internal Revenue is clothed with the authority/power to evaluate facts of tax
cases and issue assessments/demands against a taxpayer for deficiency taxes.
If a KTC Judge, on motion of an informer, renders a decision ordering the Commissioner to assess
and collect from the taxpayer certain deficiency taxes when, in fact, the BIR has already
ascertained that no deficiency taxes are due the taxpayer, what proper course of action would you
advise your informer-client to undertake?
ANSWER:
The issue being disputed assessment, jurisdiction, if at all, lies with the Court of Tax Appeals and not with
the RTC. The court decision, in my view, can be voided. I would simply advice my client to pursue the
matter administratively. If the evidence warrants, I could have the matter investigated by the
Ombudsman.
ALTERNATIVE ANSWER:
I will advise the client to go to the BIR to file an information under oath so that it may consider any
evidence my client may have in his possession. (BAR 1992)
(6) Protesting assessment
(i) Protest of assessment by taxpayer
a) Protested assessment
b) When to file a protest
1. Since the taxpayer has opted to carry-over the PI 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).
On March 10, 2010, Continental, Inc. received a preliminary assessment notice (PAN) dated March
1, 2010 issued by the Commissioner of Internal Revenue (CIR) for deficiency income tax for its
taxable year 2008. It failed to protest the PAN. The CIR thereupon issued a final assessment notice
(FAN) with letter of demand on April 30, 2010.
The FAN was received by the corporation on May 10, 2010, following which or on May 25, 2010, it
filed its protest against it.
The CIR denied the protest on the ground that the assessment had already become final and
executory, the corporation having failed to protest the PAN.
Is the CIR correct? Explain. (5%)
SUGGESTED ANSWER:
No. The issuance of preliminary assessment notice (PAN) does not give rise to the right of the taxpayer to
protest. What can be protested by a taxpayer is the final assessment notice (FAN) or that assessment
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issued following the PAN. Since the FAN was timely protested (within 30 days from receipt thereof, the
assessment did not become final and executory (Sec. 228, NIRC; RR No. 12-99).
2. A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on
June 15, 2000. The taxpayer protested the assessment on July 31, 2000. The protest was initially
given due course, but was eventually denied by the Commissioner of Internal Revenue in a decision
dated June 15, 2005. The taxpayer then filed a petition for review with the Court of Tax Appeals
(CTA), but the CTA dismissed the same.
[a] Is the CTA correct in dismissing the petition for review? Explain your answer. (4%)
SUGGESTED ANSWER:
Yes. The protest was filed out of time, hence the CTA does not acquire jurisdiction over the matter (CIR v.
Atlas Mining and Development Corp. [2000]). (BAR 2009)
c) Forms of protest
d) Content and validity of protest
(ii) Submission of documents within 60 days from filing of protest
(iii) Effect of failure to protest
(iv) Period provided for the protest to be acted upon
(7) Rendition of decision by Commissioner
(i) Denial of protest
a) Commissioner’s actions equivalent to denial of protest
1. A taxpayer received a tax deficiency assessment of P 1.2 Million from the BIR demanding payment
within 10 days, otherwise, it would collect through summary remedies. The taxpayer requested for
.a reconsideration stating the grounds therefor. Instead of resolving the request for
reconsideration, the BIR sent a Final Notice Before Seizure to the taxpayer.
May this action of the Commissioner of Internal Revenue be deemed a denial of the request for
reconsideration of the taxpayer to entitle him to appeal to the Court of Tax Appeals? Decide with
reasons. (5%)
SUGGESTED ANSWER:
Yes. The action of the Commissioner of Internal Revenue is deemed a denial of the request for
reconsideration of the taxpayer, thus entitling him to appeal to the CTA. The Notice was the only response
received by the taxpayer and its content and tenor supports the theory that it was the BIR’s final act
regarding the request for reconsideration. The very title of the notice indicated that it was a “Final Notice
Before Seizure" which means that the taxpayer’s properties will be subjected to seizure to enforce the
deficiency assessment. Thus, in one decided case, the Supreme Court ruled that the Final Notice Before
Seizure is a final decision of the Commissioner on the disputed assessment [CIR v. Isabela Cultural Corp.,
361 SCRA 71 (2001)].
ANOTHER SUGGESTED ANSWER:
No, the Final Notice Before Seizure does not constitute a denial of the request for reconsideration. The
Commissioner is mandated to come out with a decision clearly stating the facts and the law upon which it
is based and that the same constitutes his final decision. (Revenue Regulations No. 12-99, Implementing
Sec. 228, NIRC). It cannot merely be implied from the issuance of a Warrant of Distraint and Levy. [CIR v.
Union Shipping Corp., 185 SCRA 547, (1990)]. Since the final notice before seizure is issued ahead of a
Warrant of Distraint and Levy, with more reason that this earlier action cannot be considered as a denial
of the protest. (BAR 2005)
2. A Co., a Philippine corporation, received an income tax deficiency assessment from the BIR on May
5, 1995. On May 31, 1995, A Co. filed its protest with the BIR. On July 30, 1995. A Co. submitted to
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the BIR all relevant supporting documents. The CIR did not formally rule on the protest but on
January 25. 1996, A Co. was served a summons and a copy of the complaint for collection of the tax
deficiency filed by the BIR with the Regional Trial Court (RTC). On February 20. 1996, A Co.
brought a Petition for Review before the CTA. The BIR contended that the Petition is premature
since there was no formal denial of the protest of A Co. and should therefore be dismissed.
1. Has the CTA jurisdiction over the case?
2. Has the RTC jurisdiction over the collection case filed by the BIR? Explain.
SUGGESTED ANSWER:
1) Yes, the CTA has jurisdiction over the case because this qualifies as an appeal from the
Commissioner's decision on disputed assessment. When the Commissioner decided to collect the
tax assessed without first deciding on the taxpayer's protest, the effect of the Commissioner is
action of filing a judicial action for collection is a decision of denial of the protest, in which event
the taxpayer may file an appeal with the CTA. (Republic v. Lim Tian Teng &. Sons, Inc., 16 SCRA
584; Dayrit v. Cruz, L-39910, Sept. 26, 1988).
2) The RTC has no jurisdiction over the collection case filed by the BIR. The filing of an appeal with
the CTA has the effect of divesting the RTC of jurisdiction over the collection case. At the moment
the taxpayer appeals the case to the Court of Tax Appeals in view of the Commissioner's filing of
the collection case with the RTC which was considered as a decision of denial, it gives a justifiable
basis for the taxpayer to move for dismissal in the RTC of the Government's action to collect the
tax liability under dispute. {Yabesv.Flojo, 15 SCRA 278; San Juan v. Vasquez, 3 SCRA 92). There is
no final, executory and demandable assessment which can be enforced by the BIR, once a timely
appeal is filed. (BAR 1999)
3. CFB Corporation, a domestic corporation engaged in food processing and other allied activities,
received a letter from the BIR assessing it for deliquency income taxes. CFB filed a letter of protest.
One month after, a warrant of distraint and levy was served on CFB Corporation.
If you were the lawyer engaged by CFB Corporation to contest the assessment made by the BIR,
what steps will you take to protect your client? (5%)
SUGGESTED ANSWER:
I shall immediately file a motion for reconsideration of the issuance of the warrant of distraint and levy
and seek from the BIR Commissioner a denial of the protest “in clear and unequivocal language.”This is so
because the issuance of a warrant of distraint and levy is not considered as a denial by the BIR of the
protest filed by CFB Corporation (CIR v. Union Shipping Corp. 185 SCRA 547).
Within thirty (30) days from receipt of such denial “ln clear and unequivocal language," I shall then file a
petition for review with the Court of Tax Appeals.
ALTERNATIVE ANSWER:
Within thirty (30) days from receipt of the warrant of distraint and levy, I shall file a petition for review
with the Court of Tax Appeals with an application for issuance of a writ of preliminary injunction to enjoin
the Bureau of Internal Revenue from enforcing the warrant.
This is the action I shall take because I shall consider the issuance of the warrant as a final decision of the
Commissioner of Internal Revenue which could be the subject of appeal to the Court of Tax Appeals (Yabes
v. Flojo, 15 SCRA 278). The CTA may, however, remand the case to the BIR and require the Commissioner
to specifically rule on the protest. The decision of the Commissioner, if adverse to my client, would then
constitute an appeal- able decision. (BAR 1998)
4. If the request for re-investigation is denied, is it possible or advisable to file a petition for review
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with any court or agency as a last resort?
ANSWER:
A denial of a request for re-investigation on an assessment partakes the nature of a decision if made by
the Commissioner. In this a case, an appeal may be filed with the CTA within thirty days from receipt of
the notice of denial.
ALTERNATIVE ANSWER:
On the assumption that the denial by the BIR was not made by the Commissioner himself but by the
regional officer, for instance, or that the request for re-investigation is not on an assessment as yet, then it
may not necessarily constitute a decision on a disputed assessment from which an appeal may be made to
the Court of Tax Appeals. (BAR 1992)
(ii) Filing of criminal action against taxpayer
(iii) Issuing a warrant of distraint and levy
a) Inaction by Commissioner
(8) Remedies of taxpayer to action by Commissioner
(i) In case of denial of protest
1. A taxpayer received an assessment notice from the BIR on February 3, 2009. The following day, he
filed a protest, in the form of a request for reinvestigation, against the assessment and submitted
all relevant documents in support of the protest. On September 11, 2009, the taxpayer,
apprehensive because he had not yet received notice of a decision by the Commissioner on his
protest, sought your advice.
What remedy or remedies are available to the taxpayer? Explain. (4%)
SUGGESTED ANSWER:
The remedy of a taxpayer is to avail of either of two options:
1. File a petition for review with the CTA within 30 days after the expiration of the 180-day period from
submission of all relevant documents; or
2. Await the final decision of the Commissioner on the disputed assessment and appeal such final
decision to the CTA within 30 days after receipt of a copy of such decision.
These options are mutually exclusive such that resort to one bars the application of the other (RCBC v. OR,
522SCRA 144(2007]). (BAR 2009)
2. On June 1, 2003, Global Bank received a final notice of assessment from the BIR for deficiency
documentary stamp tax in the amount of P5 Million. On June 30, 2003, Global Bank filed a request
for reconsideration with the Commissioner of Internal Revenue. The Commissioner denied the
request for reconsideration only on May 30, 2006, at the same time serving on Globed Bank a
warrant of distraint to collect the deficiency tax. If you were its counsel, what will be your advice to
the bank? Explain. 5%
SUGGESTED ANSWER:
The denial of the request for reconsideration is a final decision of the Commissioner of Internal Revenue. I
would advise Global Bank to appeal the Commissioner’s denial to the Court of Tax Appeals (CTA) within
30 days from receipt, if the remedy of appeal is still available. I will further advise the bank to file a motion
for injunction with the Court of Tax Appeals to enjoin the Commissioner from enforcing the assessment
pending resolution of the appeal. While an appeal to the CTA will not suspend the payment, levy, distraint,
and/or sale of any property of the taxpayer for the satisfaction of its tax liability, the CTA is authorized to
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give injunctive relief if the enforcement would jeopardize the interest of the taxpayer, as in this case where
the assessment has not become final.
ANOTHER SUGGESTED ANSWER:
Since the denial of the protest was made on May 30, 2006, I would assume that Global Bank has already
lost its right to appeal. The assessment having become final for failure to file a timely appeal, I will now
advise my client to file a request with the Commissioner of Internal Revenue for a compromise settlement
of the tax assessed, which has already become final by invoking doubtful validity of the assessment (Sec.
204, NIRC).
ANOTHER SUGGESTED ANSWER:
Since the assessment has already become final, I will now advise Global Bank to pay the assessment in
order to save on the 20% interest which continues to run indefinitely until the entire obligation is paid
(Sec. 249, NIRC). This will also save the taxpayer and its officers from possible criminal prosecution for
non-payment of taxes considering that in taxation, criminal liability arises as a result of the civil liability to
pay taxes (Republic v. Patanao,L-22356, 20 SCRA 712 [1967]). (BAR 2006)
3. CFB Corporation, a domestic corporation engaged in food processing and other allied activities,
received a letter from the BIR assessing it for deliquency income taxes. CFB filed a letter of protest.
One month after, a warrant of distraint and levy was served on CFB Corporation.
If you were the lawyer engaged by CFB Corporation to contest the assessment made by the BIR,
what steps will you take to protect your client? (5%)
SUGGESTED ANSWER:
I shall immediately file a motion for reconsideration of the issuance of the warrant of distraint and levy
and seek from the BIR Commissioner a denial of the protest “in clear and unequivocal language.”This is so
because the issuance of a warrant of distraint and levy is not considered as a denial by the BIR of the
protest filed by CFB Corporation (CIR v. Union Shipping Corp. 185 SCRA 547).
Within thirty (30) days from receipt of such denial “ln clear and unequivocal language," I shall then file a
petition for review with the Court of Tax Appeals.
ALTERNATIVE ANSWER:
Within thirty (30) days from receipt of the warrant of distraint and levy, I shall file a petition for review
with the Court of Tax Appeals with an application for issuance of a writ of preliminary injunction to enjoin
the Bureau of Internal Revenue from enforcing the warrant.
This is the action I shall take because I shall consider the issuance of the warrant as a final decision of the
Commissioner of Internal Revenue which could be the subject of appeal to the Court of Tax Appeals (Yabes
v. Flojo, 15 SCRA 278). The CTA may, however, remand the case to the BIR and require the Commissioner
to specifically rule on the protest. The decision of the Commissioner, if adverse to my client, would then
constitute an appeal- able decision. (BAR 1998)
(ii) In case of inaction by Commissioner within 180 days from submission of
documents
1. A taxpayer received an assessment notice from the BIR on February 3, 2009. The following day, he
filed a protest, in the form of a request for reinvestigation, against the assessment and submitted
all relevant documents in support of the protest. On September 11, 2009, the taxpayer,
apprehensive because he had not yet received notice of a decision by the Commissioner on his
protest, sought your advice.
What remedy or remedies are available to the taxpayer? Explain. (4%)
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SUGGESTED ANSWER:
The remedy of a taxpayer is to avail of either of two options:
1. File a petition for review with the CTA within 30 days after the expiration of the 180-day period from
submission of all relevant documents; or
2. Await the final decision of the Commissioner on the disputed assessment and appeal such final
decision to the CTA within 30 days after receipt of a copy of such decision.
These options are mutually exclusive such that resort to one bars the application of the other (RCBC v. OR,
522SCRA 144(2007]). (BAR 2009)
(iii) Effect of failure to appeal
b. Collection
(1) Requisites
(2) Prescriptive periods
1. A final assessment notice was issued by the BIR on June 13, 2000, and received by the taxpayer on
June 15, 2000. The taxpayer protested the assessment on July 31, 2000. The protest was initially
given due course, but was eventually denied by the Commissioner of Internal Revenue in a decision
dated June 15, 2005. The taxpayer then filed a petition for review with the Court of Tax Appeals
(CTA), but the CTA dismissed the same.
[b] Assume that the CTA’s decision dismissing the petition for review has become final. May the
Commissioner legally enforce collection of the delinquent tax? Explain. (4%)
SUGGESTED ANSWER:
No. The protest was filed out of time and, therefore, did not suspend the running of the prescriptive period
for the collection of the tax. Once the right to collect has prescribed, the Commissioner can no longer
enforce collection of the tax liability against the taxpayer (CIR v. Atlas Mining and Development Corp.,
February 14,2000). (BAR 2009)
2. TY Corporation filed its final adjusted income tax return for 1993 on April 12,1994 showing a net
loss from operations. After investigation, the BIR issued a pre-assessment notice on March 30,
1996. A final notice and demand letter dated April 15, 1997 was issued, personally delivered to
and received by the company’s chief accountant. For willful refusal and failure of TY Corporation to
pay the tax, warrants of distraint and levy on its properties were issued and served upon it. On
January 10, 2002, a criminal charge for violation of the Tax Code was instituted in the Regional
Trial Court with the approval of the Commissioner.
The company moved to dismiss the criminal complaint on the ground that an act for violation of
any provision of the Tax Code prescribes after five (5) years and, in this case, the period
commenced to run on March 30,1996 when the pre-assessment was issued.
How will you resolve the motion? Explain your answer. (5%)
SUGGESTED ANSWER:
The motion to dismiss should not be granted. It is only when the assessment has become final and
unappealable that the 5-year period to file a criminal action commences to run (Tupaz v. Ulep, 316 SCRA
118 [1999]). The pre-assessment notice issued on March 30,1996 is not a final assessment which is
enforceable by the BIR. It is the issuance of the final notice and demand letter dated April 15,1997 and the
failure of the taxpayer to protest within 30 days from receipt thereof that made the assessment final and
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unappealable. The earliest date that the assessment has become final is May 16,1997 and since the
criminal charge was instituted on January 10, 2002, the same was timely filed. (BAR 2002)
3. May the collection of taxes be barred by prescription? Explain your answer. (3%)
SUGGESTED ANSWER:
Yes. The collection of taxes may be barred by prescription. The prescriptive periods for collection of taxes
are governed by the tax law imposing the tax. However, if the tax law does not provide for prescription,
the right of the government to collect taxes becomes imprescriptible. (BAR 2001)
4. Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules
that have been adopted on this score by –
(b) The National Internal Revenue Code;
SUGGESTED ANSWER:
The rules that have been adopted on prescription are as follows:
(b) National Internal Revenue Code - The statute of limitation for assessment of tax if a return is filed
is within three (3) years from the last day prescribed by law for the filing of the return or if filed
after the last day, within three years from date of actual filing. If no return is filed or the return
filed is false or fraudulent, the period to assess is within ten years from discovery of the omission,
fraud or falsity. (BAR 1997)
5. Fitness, Inc. is a domestic corporation engaged in the manufacture and sale of nutritional products.
It pays royalties to its foreign licensor. After investigation, the BIR on December 17, 1974, sent a
notice of assessment to Fitness, Inc. for allegedly failing to remit withholding tax at source for the
fourth quarter of 1973 on its royalties. It demanded payment of P3,000,000.00. The notice was received by Fitness, Inc. on December 19, 1974.
On February 8,1975, Fitness, Inc., through its counsel, protested the assessment and requested its
cancellation or withdrawal on the ground that it lacked factual and legal bases. On December 10,
1979, the Commissioner of the BIR rendered a decision reducing the assessment to PI.500.000.00.
Fitness. Inc. was not satisfied and on January 18.1980, it filed a petition for review of the decision
in the CTA to enjoin the enforcement of the assessment. On February 7, 1980, the BIR issued a
warrant of distraint against Fitness. Inc. The CTA enjoined the collection of the deficiency taxes by
virtue of the warrant of distraint. It was argued by Fitness, Inc. that the right of the BIR to collect its
alleged deficiency taxes had already prescribed. Rule on the argument.
ANSWER:
The warrant of distraint was served on the taxpayer within the prescriptive period (then 5 years, now
three (3) years). In Commissioner v. WyethSuaco (202 SCRA125), the court ruled that the prescriptive
period provided by law to make collection by distraint and/or levy or by a proceeding in court is
interrupted once a taxpayer protests the assessment and requests for its cancellation. Thus, when the
taxpayer protested the assessment on 8 February 1975, the prescriptive period to collect was interrupted
and resumed on 10 December 1979. When the Commissioner issued the warrant of distraint on 7
February 1980 it was well within the five-year (now 3 years) prescriptive period to collect.
ALTERNATIVE ANSWERS:
a) The Burea u of Internal Revenue (“BIR") shall assess internal revenue taxes within three (3) years
after the last day prescribed by law for the filing of return, and no proceeding in court without
assessment for the collection of such taxes shall be begun after the expiration of such period (Section
203 of the National Internal Revenue Code [“NIRC"). However. this three (3)-year prescriptive period
shall be suspended when the taxpayer requests for a reinvestigation and which is granted by the
Commission (Section 224 of NIRC). In case an assessment was made, the tax may be collected within
three (3) years from the date of assessment (Collector of Internal Revenue v. Pineda,2 SCRA 401;
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Umali, Roman A, Reviewer in Taxation,1985, pp. 486-487; Vitug, Jose C., Compendium of Tax Law and
Jurisprudence, 2nd Rev., Ed., 1989, p. 255). If the taxpayer asks for a reinvestigation of the assessment
and such reinvestigation is made, and on the basis of which the BIR makes another assessment, the
three (3)-year period for collection is to be counted from the last assessment (Rep. v. Lopez,7 SCRA
566; Rep. v. Acebedo, 22 SCRA 1356; Umali, Roman A., Reviewer in Taxation,1985, pp. 486-487; Vitug,
Jose C., Compendium of Tax Law and Jurisprudence, 2nd Rev., Ed., 1989, p. 255).
In the case at bar, the running of the three (3)-year prescriptive period for the BIR to collect taxes
started to run only on 10 December 1979, when a final assessment was made by the BIR reducing the
tax due to One Million Five Hundred Thousand Pesos (PI,500,000.00). The distraint against Fitness,
Inc. Hence, the action of the BIR to collect the deficiency taxes was clearly within the three (3)- year
prescriptive period.
b) The right of the BIR to collect the deficiency taxes has not prescribed, as the prescriptive period is

reckoned from the date of the reduced assessment, which is December 10, 1979. The BIR has three (3)
years from said date to collect.
The reduced assessment is In the nature of a compromise assessment, the first assessment received by
Fitness on December 19,1974, and protested only on February 8,1975, having already become final
and binding on Fitness. Applying the present provisions of the NIRC. Fitness should have protested the
assessment within thirty (30) days from receipt of the same. Failing to do so, the assessment became
final and was presumably merely compromised. The date of such compromise assessment should then
be the basis for computing the prescriptive period of three (3) years.
Note:
Beginning 1984, the prescriptive period of the right of the government to assess and collect internal
revenue taxes was reduced from five (5) to three (3) years. (BAR 1993)
(3) Distraint of personal property including garnishment
1. Is the BIR authorized to issue a warrant of garnishment against the bank account of a taxpayer
despite the pendency of his protest against the assessment with the BIR or appeal with the Court of
Tax Appeals? [5%]
SUGGESTED ANSWER:
The BIR is authorized to issue a warrant of garnishment against the bank account of a taxpayer despite the
pendency of protest (Yabes v. Flojo, 15 SCRA 278). Nowhere in the tax Code is the Commissioner required
to rule first on the protest before he can institute collection proceedings on the tax assessed. The
legislative policy is to give the Commissioner much latitude in the speedy and prompt collection of taxes
because it is in taxation that the Government depends to obtain the means to carry on its operations
(Republic v. Tim Tian Teng Sons, Inc., 16 SCRA 584).
The Commissioner is not authorized to issue the warrant of garnishment during the pendency of appeal
with the Court of Tax Appeals because the assessment is not yet final and unappealable.
ALTERNATIVE ANSWER:
No. because the assessment has not yet become final, executory and demandable. The basic consideration
in the collection of taxes is whether the assessment is final and unappealable or the decision of the
Commissioner is final, executory and demandable, the BIR has legal basis to collect the tax liability by
either administrative or judicial action. (BAR 1998)
(i) Summary remedy of distraint of personal property
a) Purchase by the government at sale upon distraint
b) Report of sale to the Bureau of Internal Revenue (BIR)
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c) Constructive distraint to protect the interest of the government
d) Summary remedy of levy on real property
1. Is the BIR authorized to collect estate tax deficiencies by the summary remedy of levy upon and
sale of real properties of the decedent without first securing the authority of the court sitting in
probate over the supposed will of the decedent? [5%]
SUGGESTED ANSWER:
Yes. The BIR is authorized to collect estate tax deficiency through the summary remedy of levying upon
and sale of real properties of a decedent, without the cognition and authority of the court sitting in
probate over the supposed will of the deceased, because the collection of estate tax is executive in
character. As such the estate tax is exempted from the application of the statute of non-claims, and this is
justified by the necessity of government funding, immortalized in the maxim that taxes are the lifeblood of
the government (Marcos v. UR, G.R. No. 120880, June 5, 1997).
ALTERNATIVE ANSWER:
Yes, if the tax assessment has already become final executory and enforceable. The approval of the court
sitting in probate over the supposed will of the deceased is not a mandatory requirement for the collection
of the estate tax.
The probate court is determining issues which are not against the property of the decedent, or a claim
against the estate as such, but is against the interest or property right which the heir, legatee, devisee, etc.
has in the property formerly held by the decedent. (Marcos v. CIR, G.R. No. 120880, June 5, 1997). (BAR
1998)
Advertisement and sale
Redemption of property sold
Final deed of purchaser
Forfeiture to government for want of bidder
a) Remedy of enforcement of forfeitures
(i) Action to contest forfeiture of chattel
b) Resale of real estate taken for taxes
(i) When property to be sold or destroyed
(ii) Disposition of funds recovered in legal proceedings or obtained
from forfeiture
(vi) Further distraint or levy
(vii) Tax lien
(viii) Compromise
(a) Authority of the Commissioner to compromise and abate taxes
(ii)
(iii)
(iv)
(v)

1. When the financial position of the taxpayer demonstrates a clear inability to pay the tax, the
Commissioner of Internal Revenue may validly compromise the tax liability.
SUGGESTED ANSWER:
True. Financial incapacity is a ground allowed by law in order that the Commissioner of Internal Revenue
may compromise a tax liability (Section 204, NIRC), (BAR 2009)
2. After the tax assessment had become final and unappealable, the Commissioner of Internal
Revenue initiated the fling of a civil action to collect the tax due from NX. After several years, a
decision was rendered by the court ordering NX to pay the tax due plus penalties and surcharges.
The judgment became final and executory, but attempts to execute the judgment award were futile.

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Subsequently, NX offered the Commissioner a compromise settlement of 50% of the judgment
award, representing that this amount is all he could really afford. Does the Commissioner have the
power to accept the compromise offer? Is it legal and ethical? Explain briefly. (5%)
SUGGESTED ANSWER:
Yes. The Commissioner has the power to accept the offer of compromise if the financial position of the
taxpayer clearly demonstrates a clear inability to pay the tax (Section 204, NIRC).
As represented by NX in his offer, only 50% of the judgment award is all he could really afford. This is an
offer for compromise based on financial incapacity which the Commissioner shall not accept unless
accompanied by a waiver of the secrecy of bank deposits (Section 6[F], NIRC). The waiver will enable the
Commissioner to ascertain the financial position of the taxpayer, although the inquiry need not be limited
only to the bank deposits of the taxpayer but also as to his financial position as reflected in his financial
statements or other records upon which his property holdings can be ascertained.
If indeed, the financial position of NX as determined by the Commissioner demonstrates a clear inability to
pay the tax, the acceptance of the offer is legal and ethical because the ground upon which the compromise
was anchored is within the context of the law and the rate of compromise is well within and far exceeds
the minimum prescribed by law which is only 10% of the basic tax assessed. (BAR 2004)
3. A domestic corporation failed to withhold and remit the tax on income received from Philippine
sources by a nonresident foreign corporation. In addition to the civil penalties provided for under
the Tax Code, a compromise penalty was imposed for violation of the withholding tax provisions.
May the Commissioner of Internal Revenue legally enforce the collection of compromise penalty?
(5%)
SUGGESTED ANSWER:
No. There is no showing that the compromise penalty was imposed by the Commissioner of Internal
Revenue with the agreement and conformity of the taxpayer. (Wonder Mechanical Engineering
Corporation v. Court of Tax Appeals, et al. 64 SCRA 555). (BAR 2000)
4. Under what conditions may the Commissioner of Internal Revenue be authorized to:
Compromise the payment of any internal revenue tax? (2%), and abate or cancel a tax liability?
(3%)
SUGGESTED ANSWER:
The Commissioner of Internal Revenue may be authorized to compromise the payment of any internal
revenue tax where:
1) A reasonable doubt as to the validity of the claim against the taxpayer exists: or
2) the financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.
The Commissioner of Internal Revenue may abate or cancel a tax liability when:
1) The tax or any portion thereof appears to be unjustly or excessively assessed: or
3) The administration and collection costs involved do not justify the collection of the amount due. (Sec.
204 (B). NIRC of 1997] (BAR 2000)
5. May the Commissioner of the Internal Revenue compromise the payment of withholding tax (tax
deducted and withheld at source) where the financial position of the taxpayer demonstrates a
clear inability to pay the assessed tax? (5%]
SUGGESTED ANSWER:
No. A taxpayer who is constituted as withholding agent who has deducted and withheld at source the tax
on the income payment made by him holds the taxes as trust funds for the government (Sec. 58[D]) and is
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obligated to remit them to the BIR. The subsequent inability of the withholding agent to pay/remit the tax
withheld is not a ground for compromise because the withholding tax is not a tax upon the withholding
agent but it is only a procedure for the collection of a tax. (BAR 1998)
6. Explain the extent of the authority of the Commissioner of Internal Revenue to compromise and
abate taxes?
ANSWER:
The authority of the Commissioner to compromise encompasses both civil and criminal liabilities of the
taxpayer. The civil compromise is allowed only in cases (a) where the tax assessment is of doubtful
validity, or (b) when the financial position of the taxpayer demonstrates a clear inability to pay the tax.
The compromise of the tax liability is possible at any stage of litigation and the amount of compromise is
left to the discretion of the Commissioner except with respect to final assessments issued against laige
taxpayers wherein the Commissioner cannot compromise for less than fifty percent (50%). Any
compromise involving large taxpayers lower than fifty percent (50%) shall be subject to the approval of
the Secretary of Finance.
All criminal violations except those involving fraud, can be compromised by the Commissioner but only
prior to the filing of the information with the Court.
The Commissioner may also abate or cancel a tax liability when (a) the tax or any portion thereof appears
to have been unjustly or excessively assessed; or (b) the administrative and collection costs involved do
not justify collection of the amount due. (Sec. 204. NIRC) (BAR 1996)
(ix) Civil and criminal actions
(a) Suit to recover tax based on false or fraudulent returns
1. Danilo, who is engaged in the trading business, entrusted to his accountant the preparation of his
income tax return and the payment of the tax due. The accountant filed a falsified tax return by
underdeclaring the sales and overstating the expense deductions by Danilo.
What is the liability, if any, of the accountant? Discuss.
SUGGESTED ANSWER:
The accountant may be held criminally liable for violation of the Tax Code when he falsified the tax return
by underdeclaring the sale and overstating the expense deductions. (Sec. 257, NIRC). If Danny's
accountant is a Certified Public Accountant, his certificate as CPA shall automatically be revoked or
cancelled upon conviction. (BAR 2005)
c. Refund
(1) Grounds and requisites for refund
1. What must a taxpayer do in order to claim a refund of, or tax credit for, taxes and penalties which
he alleges to have been erroneously, illegally or excessively assessed or collected? (3%)
SUGGESTED ANSWER:
The taxpayer must comply with the following procedures in claiming a refund of, or tax credit for, taxes
and penalties which he alleges to have been erroneously, illegally or excessively assessed or collected:
1. He should file a written claim for refund with the Commissioner within two years after the date of
payment of the tax or penalty (Sec. 204, NIRC);
2. The claim filed must state a categorical demand for reimbursement (Bermejo v. Collector, 87 Phil.
96 [1950]).
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3. The suit or proceeding for recovery must be commenced in court within two years from date of
payment of the tax or penalty regardless of any supervening event that will arise after payment
(Sec. 229, NIRC).
Note:
If the answer given is only number 1, it is suggested that the same shall be given full credit considering
that this is the only requirement for the Commissioner to acquire jurisdiction over the claim. (BAR 2002
(2) Requirements for refund as laid down by cases
1. Why is the filing of an administrative claim with the BIR necessary? (3%)
SUGGESTED ANSWER:
The filing of an administrative claim for refund with the BIR is necessary in order:
1) To afford the Commissioner an opportunity to consider the claim and to have a chance to correct
the errors of subordinate officers (Gonzales v. CTA. et aL, 14 SCRA 79): and
2) To notify the Government that such taxes have been questioned and the notice should be borne
in mind in estimating the revenue available for expenditures. [Bermejo v. Collector, G.R. No. L3028. Jufy 29, 1950)
(i) Exceptions to requirement of a written claim:
1. Can the Commissioner grant a refund or tax credit even without a written claim for it? (2%)
SUGGESTED ANSWER:
Yes. When the taxpayer files a return which on its face shows an overpayment of the tax and the option to
refund/ claim a tax credit was chosen by the taxpayer, the Commissioner shall grant the refund or tax
credit without the need for a written claim. This is so, because a return filed showing an overpayment
shall be considered as a written claim for credit or refund. (Secs. 76 and 204, NIRC). Moreover, the law
provides that the Commissioner may, even without a written claim therefore, refund or credit any tax
where on the face of the return upon which payment was made, such payment appears clearly to have
been erroneously paid. ('Sec. 229, NIRC). (BAR 2002)
(ii) Necessity of written claim for refund
1. If the retiree is within his legal rights in claiming refund of the taxes withheld, will the BIR
automatically grant his claim? Explain your answer.
ANSWER:
No. Because he must file a written claim. (BAR 1992)
(iii) Claim containing a categorical demand for reimbursement
(iv) Filing of administrative claim for refund and the suit/proceeding before the CTA
within 2 years from date of payment regardless of any supervening cause
1. ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders
who are residents of the United States. For the 2nd quarter of 1983, these U.S.- based individual
and corporate stockholders received cash dividends from the corporation. The corresponding
withholding tax on dividend income — 30% for individual and 35% for corporate non-resident
stockholders — was deducted at source and remitted to the BIR.
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On May 15,1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund,
alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends
earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax
due on the cash dividends given to its non-resident stockholders in the U.S. the Commissioner
denied the claim.
On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its
demand for refund.
Does ABCD Corporation have the legal personality to file the refund on behalf of its non-resident
stockholders? Why or why not? (3%)
SUGGESTED ANSWER:
Yes, withholding agents is not only an agent of the government but is also an agent of the taxpayer/income
earner. Hence, ABCD is also an agent of the beneficial owner of the dividends with respect to the actual
payment of the tax to the government, such authority may reasonably be held to include the authority to
file a claim for refund and to bring an action for recovery of such for refund and to bring an action for
recovery of such claim (CIR v. Procter & Gamble, 204 SCRA 377, {1991}) (BAR 2009)
2. On March 12, 2001, REN paid his taxes. Ten months later, he realized that he had overpaid and so
he immediately filed a claim for refund with the Commissioner of Internal Revenue.
On February 27, 2003, he received the decision of the Commissioner denying REN’s claim for
refund. On March 24, 2003, REN filed an appeal with the Court of Tax Appeals. Was his appeal filed
on time or not? Reason. (5%)
SUGGESTED ANSWER:
The appeal was not filed on time. The two-year period of limitation for filing a claim for refund is not only
a limitation for pursuing the claim at the administrative level but also a limitation for appealing the case to
the Court of Tax Appeals. The law provides that no suit or proceeding shall be filed after the expiration of
two years from the date of the payment of the tax or penalty regardless of any supervening cause that may
arise after payment (Section 229, NIRC). Since the appeal was only made on March 24, 2003, more than
two years had already elapsed from the time the taxes were paid on March 12, 2003. Accordingly, REN had
lost his judicial remedy because of prescription. (BAR 2004)
3. XCEL Corporation filed its quarterly income tax return for the first quarter of 1985 and paid an
Income tax of P500.000.00 on May 15, 1985. In the subsequent quarters, XCEL suffered losses so
that on April 15, 1986 it declared a net loss of PI,000,000.00 in its annual income tax return. After
failing to get a refund, XCEL filed on March 1, 1988 a case with the Court of Tax Appeals to recover
the P500.000.00 in taxes paid on May 15, 1985. Is the action to recover the taxes filed timely?
ANSWER:
The action for refund was filed in the Court of Tax Appeals on time. In the case of Commissioner v. TMX
Sales.fnc., 205 SCRA 184, which is similar to this case, the Supreme Court ruled that in the case of overpaid
quarterly corporate income tax, the two-year period for filing claims for refund In the BIR as well as in the
institution of an action for refund in the CTA, the two-year prescriptive period for tax refunds (Sec. 230,
Tax Code) is counted from the filing of the final, adjustment return under Sec. 67 of the Tax Code, and not
from the filing of the quarterly return and payment of the quarterly tax. The CTA action on March 1, 1988
was clearly within the reglementary two-year period from the filing of the final adjustment return of the
corporation on April 15, 1986. (BAR 1994)
4. Mr. Dante Raymundo retired from the government service as Director of Land Transportation on
January 6, 1985. Upon retirement, Mr. Raymundo received, among other benefits, his terminal
Page | 186

leave pay for which the BIR withheld the sum of P56.000.00 a week following the date of his
retirement.
On October 17, 1991, following the decision of the Supreme Court that the money value of the
accumulated leave credits/terminal pay is not subject to witholding tax, Mr. Raymundo filed a
claim for refund of P56.000.00 with the Commissioner of Internal Revenue.
Is Mr. Raymundo within his rights in claiming a refund of taxes withheld on his terminal leave
following the Supreme Court decision?
ANSWER:
No. Under Section 230 of the NIRC, a suit for the recovery of tax erroneously or illegally collected cannot
be filed after the expiration of two years from the date of payment of tax regardless of any supervening
cause that may arise after payment. Thus, the right of Mr. Raymundo to claim for refund has already
prescribed. (BAR 1992)
5. Assuming that the BIR denies the claim for refund, what could be the possible reason or statutory
basis for such a denial?
ANSWER:
The possible reason for a denial would be that the written claim has already prescibed or that the terminal
pay leave is not excluded from income tax. Sec. 230, NIRC (supra). (BAR 1992)
6. Discuss the theory of supervening event as it applies to claims for refund of erroneously/illegally
collected taxes. Can the retiree claim a refund under this theory? Explain.
SUGGESTED ANSWER:
The theory of supervening event expresses that an event which is beyond the control of the parties would
allow the recovery of erroneously or illegally collected taxes provided the proceeding for such recovery is
made within the prescriptive period from the occurrence of such event. The theory of the supervening
event has been abrogated by Section 230 of the NIRC. (BAR 1992)
(3) Legal basis of tax refunds
(4) Statutory basis for tax refund under the tax code
(i) Scope of claims for refund
(ii) Necessity of proof for claim or refund
1. International Technologies, Inc. (ITI) filed a claim for refund for unutilized input VAT with the
Court of Tax Appeals (CTA). In the course of the trial, ITI engaged the services of an independent
Certified Public Accountant (CPA) who examined the voluminous invoices and receipts of ITI. ITI
offered in evidence only the summary prepared by the CPA, without the invoices and the receipts,
and then submitted the case for decision.
Can the CTA grant ITI’s claim for refund based only on the CPA’s summary? Explain. (4%)
SUGGESTED ANSWER:
No. The summary prepared by the CPA does not prove anything unless the documents which were the
basis of the summary are submitted to the CTA and adduced in evidence. The invoices and receipts must
be presented because they are the only real and direct evidence that would enable the Court to determine
with particular certainty the basis of the refund (CIR v. Rio Tuba Nickel Mining Corp., 207SCRA S49[l992]).
(BAR 2009)
(iii) Burden of proof for claim of refund
(iv) Nature of erroneously-paid tax/illegally assessed collected
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1. Distinguish between a taxpayer’s remedies in connection with his tax assessment and/or demand
and his claim for refund of taxes alleged to have been erroneously or illegally collected.
ANSWER:
A tax assessment becomes final unless it is disputed or contested within 30 days from receipt thereof by
the taxpayer. If the action taken by the Commissioner on the request for reconsideration is unacceptable
to the taxpayer, the latter must then appeal, by way of Petition for Review to the Court of Tax Appeals
within thirty days from receipt of the decision of the Commissioner of Internal Revenue. The taxpayer
may also opt to pay the tax before the finality of the assessment (e.g., within 30 days from receipt of the
assessment) and then file within two years a written claim for the refund of the tax. A denial by the
Commissioner of a claim for refund must be appealed to the CTA within thirty days from receipt of notice
of denial and within two years from the day of full and final payment. Continued inaction by the
Commissioner on claims for refund may thus be taken as a denial appealable to the Court of Tax Appeals,
in order to permit the appeal to be considered or having been made within the two-year mandatory
period. (BAR 1992)
(v) Tax refund vis-à-vis tax credit
1. Congress enacts a law granting grade school and high school students a 10% discount on all schoolprescribed textbooks purchased from any bookstore. The law allows bookstores to claim in full the
discount as a tax credit.
1. If in a taxable year a bookstore has no tax due on which to apply the tax credits, can the
bookstore claim from the BIR a tax refund in lieu of tax credit? Explain. 2.5%
2. XXX
3.

If a bookstore closes its business due to losses without being able to recoup the discount, can it
claim reimbursement of the discount from the government on the ground that without such
reimbursement, the law constitutes taking of private property for public use without just
compensation? Explain. 5%

SUGGESTED ANSWER:
1. No. The law is clear that bookstores can only claim the discount as a tax credit. The term tax credit
connotes that the amount when claimed shall only be treated as a reduction from any tax liability, plain
and simple. There is nothing in the law that grants a refund when the bookstore has no tax liability against
which the tax credit can be used (CIR v. Central Luzon Drug Corp., 456 SCRA 414 [2005]).
3. No, the bookstore cannot claim reimbursement. The tax credit privilege given to it is the compensation
for the subsidy taken by the government for the benefit of a class of taxpayers to which the students
belong. However, the privilege granted is limited only to the reduction of a present or future tax liability
because by its nature, it is the existence or lack of a tax liability that determines whether the discount can
be used as a tax credit. Accordingly, if the business continues to operate at a loss and no other taxes are
due, compelling the business to close shop, the credit can never be applied and will be lost altogether. (CIR
v. Central Luzon Drug Corp., Id.) (BAR 2006)
(vi) Essential requisites for claim of refund
1. State the conditions required by the Tax Code before the Commissioner of Internal Revenue could
authorize the refund or credit of taxes erroneously or illegally received.
SUGGESTED ANSWER:
The conditions are:
Page | 188

(1) A written claim for refund is filed by the taxpayer with the Commissioner of Internal Revenue. (Sec.
204, NIRC);
(2) The claim for refund must be a categorical demand for reimbursement. [Bermejo v. Collector of
Internal Revenue, 87 Phil. 96 (1950)];
(3) The claim for refund or tax credit must be filed with the Commissioner, or the suit or proceeding
therefore must be commenced in court within 2 years from date of payment of the tax or penalty
regardless of any supervening cause (Sec. 229, NIRC). (BAR 2005)
(5) Who may claim/apply for tax refund/tax credit
(i) Taxpayer/withholding agents of non-resident foreign corporation
1. ABCD Corporation (ABCD) is a domestic corporation with individual and corporate shareholders
who are residents of the United States. For the 2nd quarter of 1983, these U.S.- based individual
and corporate stockholders received cash dividends from the corporation. The corresponding
withholding tax on dividend income — 30% for individual and 35% for corporate non-resident
stockholders — was deducted at source and remitted to the BIR.
On May 15,1984, ABCD filed with the Commissioner of Internal Revenue a formal claim for refund,
alleging that under the RP-US Tax Treaty, the deduction withheld at source as tax on dividends
earned was fixed at 25% of said income. Thus, ABCD asserted that it overpaid the withholding tax
due on the cash dividends given to its non-resident stockholders in the U.S. the Commissioner
denied the claim.
On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) reiterating its
demand for refund.
Does ABCD Corporation have the legal personality to file the refund on behalf of its non-resident
stockholders? Why or why not? (3%)
SUGGESTED ANSWER:
Yes, withholding agents is not only an agent of the government but is also an agent of the taxpayer/income
earner. Hence, ABCD is also an agent of the beneficial owner of the dividends with respect to the actual
payment of the tax to the government, such authority may reasonably be held to include the authority to
file a claim for refund and to bring an action for recovery of such for refund and to bring an action for
recovery of such claim (CIR v. Procter & Gamble, 204 SCRA 377, {1991}) (BAR 2009)
2. DEF Corporation is a wholly owned subsidiary of DEF, Inc., California, USA. Starting December 15,
2004. DEF Corporation paid annual royalties to DEF, Inc., for the use of the latter's software, for
which the former, as withholding agent of the government, withheld and remitted to the BIR the
15% final tax based on the gross royalty payments. The withholding tax return was filed and the
tax remitted to the BIR on January 10 of the following year. On April 10, 2007, DEF Corporation
filed a written claim for tax credit with the BIR, arising from erroneously paid income taxes
covering the years 2004 and 2005. The following day, DEF Corporation filed a petition for review
with the Court of Tax Appeals. involving the tax credit claim for 2004 and 2005.
b) Can the BIR lawyer raise the defense that DEF Corporation is not the proper party to file such
claim for tax credit? Explain. (3%)
SUGGESTED ANSWER:
b) No. The withholding agent who is mandated by law to withhold and remit the tax on the income of a
non-resident in the Philippines becomes directly liable for the payment of the tax. Therefore, it is the
Page | 189

proper party to file a claim for refund in case of over-withholding. (Commissioner v. Wander
Philippines, Inc., 160SCRA 573 [1988]). (BAR 2008)
3. Does a withholding agent have the right to file an application for tax refund?
SUGGESTED ANSWER:
Yes. A withholding agent should be allowed to claim for tax refund, because under the law said agent is the
one who is held liable for any violation of the withholding tax law should such violation occur
[Commissioner of Internal Revenue v. Wander Philippines Inc., 160 SCRA 570, (1988)1. Furthermore,
since the withholding agent is made personally liable to deduct and withhold any tax under Section 53(c)
of the Tax Code, it is imperative that he be considered the taxpayer for all legal intents and purposes. Thus,
by any reasonable standard, such person should be regarded as a party in interest to bring suit for refund
of taxes [Commissioner of Internal Revenue v. Procter and Gamble Philippines Manufacturing Corporation
and CTA, 204 SCRA 377, (1991). (BAR 2005)
4. A Co. is the wholly owned subsidiary of B Co., a non-resident German company. A Co. has a
trademark licensing agreement with B Co. On Feb. 10, 1995, A Co. remitted to B Co. royalties of P
10,000,000, which A Co. subjected to aWT of 25% or P2,500,000. Upon advice of counsel, A Co.
realized that the proper WT rate is 10%. On March 20, 1996, A Co. filed a claim for refund of
P2,500,000 with the BIR The BIR denied the claim on Nov. 15, 1996. On Nov. 28, 1996, ACo. filed a
petition for review with the CTA The BIR attacked the capacity of A Co.. as agent, to bring the
refund case. Decide the issue. (5%)
SUGGESTED ANSWER:
A Co., the withholding agent of the non-resident foreign corporation is entitled to claim the refund of
excess withholding tax paid on the income of said corporation in the Philippines. Being a withholding
agent, it is the one held liable for any violation of the withholding tax law should such a violation occur. In
the same vein, it should be allowed to claim a refund in case of overwithholding. (CIR v. Wander Phils. Inc.,
GR No. 68378, April 15, 1988, 160 SCRA 573; CIR v. Procter & Gamble PMC, 204 SCRA 377). (BAR 1999)
5. Corporation X declared cash dividends in favor of its non-resident stockholders in the United
States from which amount, the tax on dividend income was withheld.
Under the RP-US Tax Treaty, deductions allowed as tax on dividends earned at source were fixed
at lower rates giving rise to overpayment of the tax on dividends paid to the nonresident US
stockholders (representing the difference between the amount of withholding tax paid and the
amount supposed to have been withheld under the mentioned tax covenant).
Corporation X filed a claim for refund of said overpayment with the Commissioner of Internal
Revenue within the prescribed period which however, remained unacted upon, and before the
expiration of the two (2) year reglementary period, it filed a judicial claim for refund with the
Court of Tax Appeals.
Respondent Commissioner of Internal Revenue argues that Corporation X is not the real party in
interest to prosecute a claim for refund of the overpaid taxes of the nonresident US stockholders,
who are the real parties in interest. But neither could it maintain an action for refund in a
representative capacity having failed to show proof of authorization.
Will Corporation X*s case prosper? Explain.
ANSWER:
Yes. A subsidiary, while not the real party in interest, could prosecute a claim of refund in behalf of its
non-resident stockholders by virtue of its being the withholding agent for the government in respect of
the cash dividends it declared [Comm. vs. Wander Phils.).
Page | 190

ALTERNATIVE ANSWERS:
No. The tax is due on the non-resident stockholders. The rule is that the refund may be claimed by the
taxpayer on whom the tax is imposed and who effectively paid the tax. (BAR 1992)
(6) Prescriptive period for recovery of tax erroneously or illegally collected
1. DEF Corporation is a wholly owned subsidiary of DEF, Inc., California, USA. Starting December 15,
2004. DEF Corporation paid annual royalties to DEF, Inc., for the use of the latter's software, for
which the former, as withholding agent of the government, withheld and remitted to the BIR the
15% final tax based on the gross royalty payments. The withholding tax return was filed and the
tax remitted to the BIR on January 10 of the following year. On April 10, 2007, DEF Corporation
filed a written claim for tax credit with the BIR, arising from erroneously paid income taxes
covering the years 2004 and 2005. The following day, DEF Corporation filed a petition for review
with the Court of Tax Appeals. involving the tax credit claim for 2004 and 2005.
a) As a BIR lawyer handling the case, would you raise the defense of prescription in your answer
to the claim for tax credit? Explain. (3%)
SUGGESTED ANSWER:
a) Yes. The claim for refund for the2004erroneously paid income tax was filed out of time because the
claim was only filed after more than two years had elapsed from the payment thereof. (Section 204 (c)
and 229, NIRC). (BAR 2008)
2. On March 12, 2001, REN paid his taxes. Ten months later, he realized that he had overpaid and so
he immediately filed a claim for refund with the Commissioner of Internal Revenue.
On February 27, 2003, he received the decision of the Commissioner denying REN’s claim for
refund. On March 24, 2003, REN filed an appeal with the Court of Tax Appeals. Was his appeal filed
on time or not? Reason. (5%)
SUGGESTED ANSWER:
The appeal was not filed on time. The two-year period of limitation for filing a claim for refund is not only
a limitation for pursuing the claim at the administrative level but also a limitation for appealing the case to
the Court of Tax Appeals. The law provides that no suit or proceeding shall be filed after the expiration of
two years from the date of the payment of the tax or penalty regardless of any supervening cause that may
arise after payment (Section 229, NIRC). Since the appeal was only made on March 24, 2003, more than
two years had already elapsed from the time the taxes were paid on March 12, 2003. Accordingly, REN had
lost his judicial remedy because of prescription. (BAR 2004)
3. A corporation files its income tax return on a calendar year basis. For the first quarter of 1993, it
paid on 30 May 1993 its quarterly income tax in the amount of P3.0 million. On 20 August 1993, it
paid the second quarterly income tax of P0.5 million. The third quarter resulted in a net loss, and
no tax was paid. For the fourth and final return for 1993, the company reported a net loss for the
year, and the taxpayer Indicated in the income tax return that it opted to claim a refund of the
quarterly income tax payments.
On 10 January 1994, the corporation filed with the Bureau of Internal Revenue a written claim for
the refund of P3.5 million.
BIR failed to act on the claim for refund; hence, on 02 March 1996, the corporation filed a petition
for review with the Court of Tax Appeals on its claim for refund of the overpayment of its 1993
quarterly income tax. BIR, in its answer to the petition, alleged that the claim for refund was filed
beyond the reglementary period.
Page | 191

Did the claim for refund prescribe?
ANSWER:
The claim for refund has prescribed. The counting of the two-year prescriptive period for filing a claim for
refund is counted not from the date when the quarterly income taxes were paid but on the date when the
final adjustment return or annual income tax return was filed (CIR v. TMX Sales Inc., G.R. No. 83736,
January 15, 1992; CIR v. PhilAm Life Insurance Co., Inc., G.R. No. 105208, May 29, 1995). It is obvious that
the annual income tax return was filed before January 10, 1994 because the written claim for refund was
filed with the BIR on January 10,1994. Since the two-year prescriptive period is not only a limitation of
action in the administrative stage but also a limitation of action for bringing the case to the judicial stage,
the petition for review filed with the CTA on March 02, 1996 is beyond the reglementary period. (BAR
1997)
4. Is protest at the time of payment of taxes/duties a requirement to preserve the taxpayers’ right to
claim a refund? Explain.
ANSWER:
For taxes imposed under the NIRC, protest at the time of payment is not required to preserve the
taxpayers’ right to claim refund. This is clear under Section 230 of the NIRC which provides that a suit or
proceeding maybe maintained for the recovery of national internal revenue tax or penalty alleged to have
been erroneously assessed or collected, whether such tax or penalty has been paid under protest or not.
For duties imposed under the Tariff and Customs Code, a protest at the time of payment is required to
preserve the taxpayers’ claim for refund. The procedure under the TCC is to the effect that when a ruling
or decision of the Collector of Customs is made whereby liability for duties is determined, the party
adversely affected may protest such ruling or decision by presenting to the Collector, at the time when
payment is made, or within fifteen days thereafter, a written protest setting forth his objections to the
ruling or decision in question (Sec. 2308, TCC). (BAR 1996)
5. Apple Computer Corp. (ACC) is a foreign corporation doing business in the Philippines through a
local branch located at Makati, Metro Manila. In 1985, the local branch applied with the Central
Bank for authority to remit to ACC branch profits amounting to P8,000,000.00. After paying the
15% branch remittance tax of PI,200,000.00, the branch office remitted to ACC the balance of
P6.800.000.00. In January 1986, the branch office was advised by its. legal counsel that it overpaid
the branch remittance tax since the basis of the computation thereof should be the amount
actually remitted and not the amount applied for. Accordingly, the branch office applied for a
refund in the amount of P180.000.00.
If you were the Commissioner of Internal Revenue, would you grant the claim for refund?
ANSWER:
If I were the Commissioner of Internal Revenue, I would allow the claim for refund. The remittance tax
should be computed on the amount actually remitted (Marubeni Corporation vs. Commissioner, G.R No.
76573, 14 September 1989). In the refund of taxes, the claim therefor can be filed within two (2) years
from the time of payment so long as the tax payment was made before an assessment by the Commissioner has become final (Sec. 230, N1RC). (BAR 1991)
(7) Other consideration affecting tax refunds
2.

Government remedies
a. Administrative remedies
(1) Tax lien
(2) Levy and sale of real property
(3) Forfeiture of real property to the government for want of bidder
Page | 192

(4) Further distraint and levy
(5) Suspension of business operation
(6) Non-availability of injunction to restrain collection of tax
b. Judicial remedies
3. Statutory offenses and penalties
a. Civil penalties
(1) Surcharge
1. What constitutes prima facie evidence of a false or fraudulent return to justify the imposition of a
50% surcharge on the deficiency tax due from a taxpayer? Explain. (5%)
SUGGESTED ANSWER:
There is a prima facie evidence of false or fraudulent return when the taxpayer substantially
underdeclared his taxable sales, receipts or income, or substantially overstated his deductions, the
taxpayer’s failure to report sales, receipts or income in an amount exceeding 30% of that declared per
return, and a claim of deduction in an amount exceeding 30% of actual deduction shall render the
taxpayer liable for substantial underdeclaration and overdeclaration, respectively, and will justify the
imposition of the 50% surcharge on the deficiency tax due from the taxpayer. (Sec. 248, NIRC). (BAR
2002)
(2) Interest
(i) In general
(ii) Deficiency interest
1. Danilo, who is engaged in the trading business, entrusted to his accountant the preparation of his
income tax return and the payment of the tax due. The accountant filed a falsified tax return by
underdeclaring the sales and overstating the expense deductions by Danilo.
Is Danilo liable for the deficiency tax and the penalties thereon? What is the liability, if any, of the
accountant? Discuss. (5%)
SUGGESTED ANSWER:
Yes, Danilo is liable for the deficiency tax as well as for the deficiency interest. However, he is not liable to
the fraud penalty because the accountant acted beyond the limits of his authority. A tax return which does
not correctly reflect taxable income may only be false but not necessarily fraudulent where it appears that
the return was not prepared by the taxpayer himself but by his accountant. Accordingly, the 50%
surcharge for fraud could not be imposed. [Aznar v. CTA, 58 SCRA 719, (1974)].
On the other hand, the accountant may be held criminally liable for violation of the Tax Code when he
falsified the tax return by underdeclaring the sale and overstating the expense deductions. (Sec. 257,
NIRC). If Danny's accountant is a Certified Public Accountant, his certificate as CPA shall automatically be
revoked or cancelled upon conviction. (BAR 2005)
2. What is a “deficiency interest" for purposes of the income tax? Illustrate.
ANSWER:
Deficiency interest for purposes of the income tax is the interest due on any amount of tax due or
installment thereof which is not paid on or before the date prescribed for its payment computed at the
rate of 20% per annum or the Manila Reference Rate, whichever is higher, from the date prescribed for its
payment until it is fully paid. If for example after the audit of the books of XYZCorp. for taxable year 1993
there was found to be due a deficiency income tax of PI25,000.00 inclusive of the 25% surcharge imposed
under Section 248 of the Tax Code, the interest will be computed on the P125.000.00 from April 15, 1994
up to its date of payment. (BAR 1995)
Page | 193

(iii) Delinquency interest
1. What is a “delinquency interest" for purposes of the income tax? Illustrate.
ANSWER:
Delinquency interest is the interest of 20% or the Manila Reference Rate, whichever is higher, required to
be paid in case of failure to pay:
a) the amount of the tax due on any return required to be filed; or
b) the amount of the tax due for which return is required; or
c) the deficiency tax or any surcharge or interest thereon, on the due date appearing in the notice and
demand of the Commissioner of Internal Revenue.
If in the above illustration the assessment notice was released on December31,1994 and the amount of
deficiency tax, inclusive of surcharge and deficiency interest were computed up to January 30, 1995 which
is the due date for payment per assessment notice, failure to pay on this latter date will render the tax
delinquent and will require the payment of delinquency interest. (BAR 1995)
(iv) Interest on extended payment
Compromise and abatement of taxes
a. Compromise
1. State and discuss briefly whether the following cases may be compromised or may not be
compromised:
4.

a) Delinquent accounts:
b) Cases under administrative protest, after issuance of the final assessment notice to the
taxpayer, which are still pending:
c) Criminal tax fraud cases;
d) Criminal violations already filed in court;
e) Cases where final reports of reinvestigation or reconsideration have been issued resulting in
the reduction of the original assessment agreed to by the taxpayer when he signed the required
agreement form. (5%)
SUGGESTED ANSWER:
a) Delinquent accounts may be compromised if either of the two conditions is present: (1) the
assessment is of doubtful validity, or (2) the financial position of the taxpayer demonstrates a clear
inability to pay the tax. (Sec. 204(A), NIRC; Sec. 2 of Revenue Regulations No. 30- 2002).
b) These may be compromised, provided that it is premised upon doubtful validity of the assessment or
financial incapacity to pay (ibid).
c) These may not be compromised, so that the taxpayer may not profit from his fraud, thereby
discouraging its commission (ibid).
d) These may not be compromised in order that the taxpayer will not profit from his criminal acts (ibid).
e) Cases where final reports of reinvestigation or reconsideration have been issued resulting in the
reduction of the original assessment agreed to by the taxpayer when he signed the required
agreement form, cannot be compromised. By giving his conformity to the revised assessment, the
taxpayer admits the validity of the assessment and his capacity to pay the same. (Sec. 2 of Revenue
Regulations No. 30-2002). (BAR 2005)
2. Minolta Philippines, Inc. (Minolta) is an EPZA-registered enterprise enjoying preferential tax
treatment under a special law. After investigation of its withholding tax returns for the taxable
Page | 194

year 1997, the BIR issued a deficiency withholding tax assessment in the amount of P150,000.00.
On May 15, 1999, because of financial difficulty, the deficiency tax remained unpaid, as a result of
which the assessment became final and executory. The BIR also found that, in violation of the
provisions of the National Internal Revenue Code, Minolta did not file its final corporate income tax
return for the taxable year 1998, because it allegedly incurred net toss from its operations. On May
17, 2002, the BIR filed with the Regional Trial Court an action for collection of the deficiency
withholding tax for 1997.
May criminal violations of the Tax Code be compromised? If Minolta makes a voluntary offer to
compromise the criminal violations for non-filing and non-payment of taxes for the year 1998, may
the Commissioner accept the offer? Explain (5%)
SUGGESTED ANSWER:
All criminal violations of the Tax Code may be compromised except those already filed in court or those
involving fraud (Section 204, NIRC). Accordingly, if Minolta makes a voluntary offer to compromise the
criminal violations for non-filing and non-payment of taxes for the year 1998, the Commissioner may
accept the offer which is allowed by law. However, if it can be established that a tax has not been paid as a
consequence of non-filing of the return, the civil liability for taxes may be dealt with independently of the
criminal violations. The compromise settlement of the criminal violations will not relieve the taxpayer
from its civil liability. But the civil liability for taxes may also be compromised if the financial position of
the taxpayer demonstrates a clear inability to pay the tax. (BAR 2002)
3. An information was filed in court for willful non-payment of income tax the assessment of which
has become final. The accused, through counsel, presented a motion that he be allowed to
compromise his tax liability subject of the information. The prosecutor indicated his conformity to
the motion. Is this procedure correct? (5%]
SUGGESTED ANSWER:
No. Criminal violations, if already filed in court, may not be compromised (Sec. 204[B], NIRC).
Furthermore, the payment of the tax due after apprehension shall not constitute a valid defense in any
prosecution for violation of any provisions of the Tax Code (Sec. 247(a), NIRC). Finally, there is no showing
that the prosecutor in the problem is a legal officer of the Bureau of Internal Revenue to whom the
conduct of criminal actions is lodged by the Tax Code.
ALTERNATIVE ANSWER:
No. If the compromise referred to is the civil aspect, the procedure followed is not correct. Compromise for
the payment of any internal revenue tax shall be made only by the Commissioner of Internal Revenue or in
a proper case the Evaluation Board of the BIR (Sec. 204, NIRC). Applying the law to the case at bar,
compromise settlement can only be effected by leave of Court. (BAR 1998)
4. May the Commissioner of the Internal Revenue compromise the payment of withholding tax (tax
deducted and withheld at source) where the financial position of the taxpayer demonstrates a
clear inability to pay the assessed tax? (5%]
SUGGESTED ANSWER:
No. A taxpayer who is constituted as withholding agent who has deducted and withheld at source the tax
on the income payment made by him holds the taxes as trust funds for the government (Sec. 58[D]) and is
obligated to remit them to the BIR. The subsequent inability of the withholding agent to pay/remit the tax
withheld is not a ground for compromise because the withholding tax is not a tax upon the withholding
agent but it is only a procedure for the collection of a tax. (BAR 1998)
5. May the tax liability of a taxpayer be compromised during the pendency of an appeal? Explain.
ANSWER:
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Yes. During the pendency of the appeal, the taxpayer may still enter into a compromise settlement of his
tax liability for as long as any of the grounds for a compromise, ie. doubtful validity of assessment and
financial incapacity of taxpayer, is present. A compromise of a tax liability is possible at any stage of
litigation, even during appeal, although legal propriety demands that prior leave of court should be
obtained (Pasudeco vs. CIR. L-39387. June 29. 1982). (BAR 1996)
b. Abatement
F. Organization and Function of the Bureau of Internal Revenue
1. Rule-making authority of the Secretary of Finance
a. Authority of Secretary of Finance to promulgate rules and regulations
1. XYZ Corporation, an export-oriented company, was able to secure a Bureau of Internal Revenue
(BIR) ruling in June 2005 that exempts from tax the importation of some of its raw materials. The
ruling is of first impression, which means the interpretations made by the Commissioner of
Internal Revenue are one without established precedents. Subsequently, however, the BIR issued
another ruling which in effect would subject to tax such kind of importation. XYZ Corporation is
concerned that said ruling may have a retroactive effect, which means that all their importations
done before the issuance of the second ruling could be subject to tax.
What are BIR rulings?
SUGGESTED ANSWERS:
BIR rulings are administrative opinions issued by the Commissioner of Internal Revenue interpretative of
a provision of a tax law.
ALTERNATIVE ANSWER:
They are the best guess of the moment and incidentally often contain such well-considered and sound law,
but the courts have held that they do not prevent an entire change of front at any time and are merely
advisory - sort of an information service to the taxpayer. (Aban, Law of Basic Taxation in the Philippines, p.
149 citing Quiazon and Lukban). (BAR 2007)
b. Specific provisions to be contained in rules and regulations
1. What is required to make a BIR ruling of first impression a valid one?
SUGGESTED ANSWER:
A BIR ruling of first impression to be valid must not be against the law and it must be issued only by the
Commissioner of Internal Revenue. (Philippine Bank of Communications v. CIR, 302 SCRA 241 [1999];
Section 7, NIRC). (BAR 2007)
c. Non-retroactivity of rulings
1. Does a BIR ruling have a retroactive effect, considering the principle that tax exemptions should be
interpreted strictly against the taxpayer?
SUGGESTED ANSWER:
No. A BIR ruling cannot be given retroactive effect if its retroactive application is prejudicial to the
taxpayer. (Section 246, NIRC; CIR v. Court of Appeals et. al. 267 SCRA 557[1997]).
ALTERNATIVE ANSWER:
The general rule is that a BIR ruling does not have a retroactive effect if giving it a retroactive application
is prejudicial to the taxpayer. However, if the first ruling is tainted with either of the following: (1)
misstatement or omission of material facts, (2) the facts gathered by the BIR are materially different from
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the facts upon which the ruling is based, or (3) the taxpayer acted in bad faith, a subsequent ruling can
have a retroactive application. (ABS-CBN Broadcasting Co. v. CTA & CIR, 08 SCRA 142 [1981]; Sec 246,
NIRC). (BAR 2007)
2. Due to an uncertainty whether or not a new tax law is applicable to printing companies. DEF
Printers submitted a legal query to the Bureau of Internal Revenue on that issue. The BIR issued a
ruling that printing companies are not covered by the new law. Relying on this ruling, DEF Printers
did not pay said tax.
Subsequently, however, the BIR reversed the ruling and issued a new one stating that the tax
covers printing companies. Could the BIR now assess DEF Printers for back taxes corresponding to
the years before the new ruling? Reason briefly. (5%)
SUGGESTED ANSWER:
No. Reversal of a ruling shall not be given a retroactive application if said reversal will be prejudicial to the
taxpayer. Therefore, the BIR can not assess DEF printers for back taxes because it would be violative of the
principle of non-retroactivity of rulings and doing so would result in grave injustice to the taxpayer who
relied on the first ruling in good faith (Section 246, NIRC; CIR v. Burroughs, Inc,, 142 SCRA 32411986]),
(BAR 2004)
2.

Power of the Commissioner to suspend the business operation of a taxpayer

III. Local Government Code of 1991, as amended

A. Local government taxation
1. Fundamental principles
2. Nature and source of taxing power
1. What is the nature of the taxing power of the provinces, municipalities and cities? How will the
local government units be able to exercise their taxing powers?
SUGGESTED ANSWER:
The taxing power of the provinces, municipalities and cities is directly conferred by the
Constitution by giving them the authority to create their own sources of revenue. The local
government units do not exercise the power to tax as an inherent power or by a valid delegation of
the power by Congress, but pursuant to a direct authority conferred by the Constitution. (Mactan
Cebu International Airport Authority v. Marcos, 261 SCRA 667 [1996]; NPC v. City of Cabanatuan,
401 SCRA 259 [2003]).
The local government units exercise the power to tax by levying taxes, fees and charges consistent with
the basic policy of local autonomy, and to assess and collect all these taxes, fees and charges which will
exclusively accrue to them. The local government units are authorized to pass tax ordinances (levy) and to
pursue actions for the assessment and collection of the taxes imposed in said ordinances. (Section 129,
and 132, Local Government Code). (BAR 2007)
2. Which of the following propositions may now be untenable:
1. The court should construe a law granting tax exemption strictly against the taxpayer.
2. The court should construe a law granting a municipal corporation the power to tax most
strictly.
3. The Court of Tax Appeals has jurisdiction over decisions of the Customs Commissioner in cases
involving liability for customs duties.
4. The Court of Appeals has jurisdiction to review decisions of the Court of Tax Appeals.
5. The Supreme Court has jurisdiction to review decisions of the Court of Appeals.
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Justify your answer or choice briefly. (5%)
SUGGESTED ANSWER:
2. The court should construe a law granting a municipal corporation the power to tax most strictly.
This proposition is now untenable. The basic rationale for the grant of tax power to local government units
is to safeguard their viability and self-sufficiency by directly granting them general and broad tax powers
(Manila Electric Company). Province of Laguna et. al 306 SCRA 750 [1999). Considering that inasmuch as
the power to tax may be exercised by local legislative bodies, no longer by valid congressional delegation
but by direct authority conferred by the Constitution, in interpreting statutory provisions on municipal
fiscal powers, doubts will, therefore, have to be resolved in favor of municipal corporations (City
Government of San Pablo, Laguna v. Reyes, 305 SCRA 353 (1999]). This means that the court must adopt a
liberal construction of a law granting a municipal corporation the power to tax.
Note:
Of the examinee chose proposition no. 4 as his answer, it should be given full credit considering that the
present CTA Act (R.A. No. 9282) has made the CTA a coequal judicial body of the Court of Appeals. The
question “Which of the following propositions may now be untenable" may lead the examinee to choose a
proposition which is untenable on the basis of the new law despite the cut-off date adopted by the Bar
Examination Committee. R.A. No. 9282 was passed on March 30, 2004. (BAR 2004)
3. Congress, after much public hearing and consultations with various sectors of society, came to the
conclusion that it will be good for the country to have only one system of taxation by centralizing
the imposition and collection of all taxes in the national government. Accordingly, it is thinking of
passing a law that would abolish the taxing power of all local government units. In your opinion,
would such a law be valid under the present Constitution? Explain your answer. (5%)
SUGGESTED ANSWER:
No. The law centralizing the imposition and collection of all taxes in the national government would
contravene the Constitution which mandates that : . . . "Each local government unit shall have the power to
create their own sources of revenue and to levy taxes, fees, and charges subject to such guidelines and
limitations as Congress may provide consistent with the basic policy of local autonomy." It is clear that
Congress can only give the guidelines and limitations on the exercise by the local governments of the
power to tax but what was granted by the fundamental law cannot be withdrawn by Congress. (BAR 2001)
a. Grant of local taxing power under the local government code
b. Authority to prescribe penalties for tax violations
c. Authority to grant local tax exemptions
1. May the deficiency business tax be paid in installments without surcharge and interest? Explain.
(3%)
SUGGESTED ANSWER:
Yes. Local government units may, through ordinances duly approved, grant reliefs to taxpayers under such
terms and conditions as they may deem necessary. Such reliefs may take the form of condonation or
extension of time for payment or non-imposition of surcharge or interest. (Section 192, LGC). Accordingly,
the deficiency business taxes may be paid in installment without surcharge and interest through the
passage of an ordinance for that purpose. (BAR 2008)
d. Withdrawal of exemptions
e. Authority to adjust local tax rates
f. Residual taxing power of local governments
g. Authority to issue local tax ordinances
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1. In order to raise revenue for the repair and maintenance of the newly constructed City Hall of
Makati, the City Mayor ordered the collection of P1.00, called “elevator tax", every time a person
rides any of the high-tech elevators in the city hall during the hours of 8:00 a.m. to 10:00 a.m. and
4:00 p.m. to 6:00 p.m. Is the “elevator tax" a valid imposition? Explain.
SUGGESTED ANSWER:
No. The imposition of a tax, fee or charge or the generation of revenue under the Local Government Code
shall be exercised by the Sanggunian of the local government unit concerned through an appropriate
ordinance (Section 132 of the Local Government Code). The city mayor alone could not order the
collection of the tax; as such, the “elevator tax” is an invalid imposition. (BAR 2003)
2. An Ordinance was passed by the Provincial Board of a Province in the North, increasing the rate of
basic real property tax from 0.006% to 1 % of the assessed value of the real property effective
January 1, 2000. Residents of the municipalities of the said province protested the Ordinance on
the ground that no public hearing was conducted and, therefore, any increase in the rate of real
property tax is void.
Is there merit in the protest? Explain your answer. (2%)
SUGGESTED ANSWER:
The protest is devoid of merit. No public hearing is required before the enactment of a local tax ordinance
levying the basic real property tax (Art. 324, LGC Regulations).
ALTERNATIVE ANSWER:
Yes, there is merit in the protest provided that sufficient proof could be introduced for the non-observance
of public hearing. By implication, the Supreme Court recognized that public hearings are required to be
conducted prior to the enactment of an ordinance imposing real property taxes. Although it was concluded
by the highest tribunal that presumption of validity of a tax ordinance can not be overcome by bare
assertions of procedural defects on its / enactment, it would seem that if the taxpayer had presented
evidence to support the allegation that no public hearing was conducted, the Court should have ruled that
the tax ordinance is invalid. (Belen Figuerres v. Court of Appeals, GRNo. 119172, March 25,1999). (BAR
2002)
3.

Local taxing authority
a) Power to create revenues exercised through Local Government Units

1. In order to raise revenue for the repair and maintenance of the newly constructed City Hall of
Makati, the City Mayor ordered the collection of P1.00, called “elevator tax", every time a person
rides any of the high-tech elevators in the city hall during the hours of 8:00 a.m. to 10:00 a.m. and
4:00 p.m. to 6:00 p.m. Is the “elevator tax" a valid imposition? Explain.
SUGGESTED ANSWER:
No. The imposition of a tax, fee or charge or the generation of revenue under the Local Government Code
shall be exercised by the Sanggunian of the local government unit concerned through an appropriate
ordinance (Section 132 of the Local Government Code). The city mayor alone could not order the
collection of the tax; as such, the “elevator tax” is an invalid imposition. (BAR 2003)
b) Procedure for approval and effectivity of tax ordinances
1. An Ordinance was passed by the Provincial Board of a Province in the North, increasing the rate of
basic real property tax from 0.006% to 1 % of the assessed value of the real property effective
January 1, 2000. Residents of the municipalities of the said province protested the Ordinance on
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the ground that no public hearing was conducted and, therefore, any increase in the rate of real
property tax is void.
Is there merit in the protest? Explain your answer. (2%)
SUGGESTED ANSWER:
The protest is devoid of merit. No public hearing is required before the enactment of a local tax ordinance
levying the basic real property tax (Art. 324, LGC Regulations).
ALTERNATIVE ANSWER:
Yes, there is merit in the protest provided that sufficient proof could be introduced for the non-observance
of public hearing. By implication, the Supreme Court recognized that public hearings are required to be
conducted prior to the enactment of an ordinance imposing real property taxes. Although it was concluded
by the highest tribunal that presumption of validity of a tax ordinance cannot be overcome by bare
assertions of procedural defects on its / enactment, it would seem that if the taxpayer had presented
evidence to support the allegation that no public hearing was conducted, the Court should have ruled that
the tax ordinance is invalid. (Belen Figuerres v. Court of Appeals, GR No. 119172, March 25,1999). (BAR
2002)
4.
5.

Scope of taxing power
Specific taxing power of Local Government Units
a. Taxing powers of provinces
(1) Tax on transfer of real property ownership
(2) Tax on business of printing and publication
(3) Franchise tax

1. The Local Government Code took effect on January 1, 1992.
PLDT’s legislative franchise was granted sometime before 1992. Its franchise provides that PLDT
will only pay 3% franchise tax in lieu of all taxes. The legislative franchises of Smart and Globe
Telecoms were granted in 1998. Their legislative franchises state that they will pay only 5%
franchise tax in lieu of all taxes.
The Province of Zamboanga del Norte passed an ordinance in 1997 that imposes a local franchise
tax on all telecommunication companies operating within the province. The tax is 50% of 1% of
the gross annual receipts of the preceding calendar year based on the incoming receipts, or
receipts realized, within its territorial jurisdiction.
Is the ordinance valid? Are PLDT, Smart and Globe liable to pay franchise taxes? Reason briefly.
SUGGESTED ANSWER:
The ordinance is valid. The Local Government Code explicitly authorizes provincial governments,
notwithstanding any law or other special law, to impose a tax on business enjoying a franchise at the rate
of 50% of 1% based on the gross annual receipts during the preceding year within the province. (Section
137, LGC).
PLDT is liable to the franchise tax levied by the province of Zamboanga del Norte. The tax exemption
privileges on franchises granted before the passage of the Local Government Code are effectively repealed
by the latter law. (PLDT v. City of Davao, 363 SCRA 522 12001J).
Smart and Globe, however, are not liable to the franchise tax imposed under the provincial ordinance. The
legislative franchises of Smart and Globe were granted in 1998, long after the Local Government Code took
effect. Congress is deemed to have been aware of the provisions of the earlier law. When it granted the
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exemption. Accordingly, the latest will of the legislature to grant tax exemption must be granted. (BAR
2007)
(4) Tax on sand, gravel and other quarry services
(5) Professional tax
1. The City of Manila enacted Ordinance No. 55-66 which imposes a municipal occupation tax on
persons practicing various professions in the city. Among those subjected to the occupation tax
were lawyers. Atty. Mariano Batas, who has a law office in Manila, pays the ordinance-imposed
occupation tax under protest. He goes to court to assail the validity of the ordinance for being
discriminatory. Decide with reasons. (3%)
SUGGESTED ANSWER:
The ordinance is valid. The tax imposed by the ordinance is in the nature of a professional tax which is
authorized by law to be imposed by cities (Section 151 in relation to Section 139, LGC). The ordinance is
not discriminatory because the City Council has the power to select the subjects of taxation and impose
the same tax on those belonging to the same class. The authority given by law to cities is to impose a
professional tax only on persons engaged in the practice of their profession requiring government
examination and lawyers are included within that class of professionals. (BAR 2009)
2. Mr. Fermin, a resident of Quezon City, is a Certified Public Accountant- Lawyer engaged in the
Practice of his two professions. He has his main office in Makati City and maintains a branch office
in Pasig City. Mr. Fermin pays his professional tax as a CPA in Makati City and his professional tax
as a lawyer in Pasig City.
a. May Makati City, where he has his main office, require him to pay his professional tax as a
lawyer? Explain.
b. May Quezon City, where he has his residence and where he also practices his two professions,
go after him for the payment of his professional tax as a CPA and a lawyer? Explain. (5%)
SUGGESTED ANSWER:
a. No. Mr. Fermin is given the option to pay either in the city where he practices his profession or where
he maintains his principal office in case he practices his profession in several places. The professional
tax paid as a lawyer in Pasig City, a place where he practices his profession, will entitle him to practice
his profession in any part of the Philippines without being subjected to any other national or local tax,
license, or fee for the practice of such profession. (Sec. 139 in relation to 151, Local Government Code).
b. No. The professional tax shall be paid only once for every taxable year and the payment shall be made
either in the city where he practices his profession or where he maintains his principal office. The city
of residence cannot require him to pay his professional taxes. (Sec. 139 in relation to Sec. 151, Local
Government Code). (BAR 2005)
(6) Amusement tax
(7) Tax on delivery truck/van
b. Taxing powers of cities
c. Taxing powers of municipalities
1. The Municipality of Malolos passed an ordinance imposing a tax on any sale or transfer of real
property located within the municipality at a rate of one-fourth (1/4) of one percentum (1%) of
the total consideration of such transaction. X sold a parcel of land in Malolos which he inherited
from his deceased parents and refused to pay the aforesaid tax. He instead filed appropriate case
asking that the ordinance be declared null and void since such a tax can only be collected by the
national government, as in fact he has paid BIR the required capital gains tax. The Municipality
countered that under the Constitution, each local government is vested with the power to create its
own sources of revenue and to levy taxes, and it imposed the subject tax in the exercise of said
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constitutional authority. Resolve the controversy.
ANSWER:
The ordinance passed by the Municipality of Malolos imposing a tax on the sale or transfer of real
property is void. The Local Tax Code only allows provinces and cities to impose a tax on the transfer of
ownership of real property (Sec. 7 and Sec. 23, Local Tax Code). Municipalities are prohibited from
imposing said tax that provinces are specifically authorized to levy. (Sec. 22, Local Tax Code)
.
While it is true that the Constitution has given broad powers of taxation to local government units, this
delegation, however, is subject to such limitations as may be provided by law (Sec. 5, Art X, 1987
Constitution). (BAR 1991)
(1) Tax on various types of businesses
(2) Ceiling on business tax impossible on municipalities within Metro Manila
(3) Tax on retirement on business
1. How are retiring businesses taxed under the Local Government Code? (2%)
SUGGESTED ANSWER:
Retiring business under the LGC are taxed on their gross sales or gross receipts in the current year and not
on the preceding year. If the tax paid in the current year is less than the tax due on gross sales or receipts
of the current year, the difference shall be paid before the business is considered officially retired (Sec.
145, LGC).
(4) Rules on payment of business tax
1. What is the basis for the computation of business tax on contractors under the local government
code? (2%)
SUGGESTED ANSWER:
The business tax on contractors is a graduated annual fixed tax based on the gross receipts for the
preceding calendar year. However, when the gross receipts amount to P2 million or more, the business tax
on contractors is imposed as a percentage tax at the rate of 50% of 1% (Sec. 143(e), LGC).
2. Ferremaro, Inc., a manufacturer of handcrafted shoes, maintains its principal office in Cubao,
Quezon City. It has branches/sales offices in Cebu and Davao. Its factory is located in Marikina City
where most of its workers live. Its principal office in Quezon City is also a sales office.
Sales of finished products for calendar year 2009 in the amount of P10 million were made at the
following locations:
Cebu branch
Davao branch
Quezon City branch
Total

25%
15%
60%
100%

Where should the applicable local taxes on the shoes be paid? Explain. (3%)
SUGGESTED ANSWER:
Twenty five percent (25%) of total sales or P2.5 million shall be taxed in Cebu, and 15% of total sales or
PI.5 million shall be taxed in Davao. For the remaining 60% sales amounting to P6 million which are
recorded in the principal office, 30% thereof or P1.8 million is taxable in Quezon City where the principal
office is located and 70% or P4.2 million is taxable in Marikina City where the factory is located.
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Under the law, manufacturers maintaining a branch or sales outlet shall record the sale in the branch or
sales outlet making the sale and pay the tax in the city or municipality where the branch or sales outlet is
located. Since Ferremaro, Inc., maintains one factory, the sales recorded in the principal office shall be
allocated and 30% of said sales are taxable in the place where the principal office is located while 70% is
taxable in the place where the factory is located (Sec. 150, LGC).
(5) Fees and charges for regulation & licensing
1. The Sangguniang Bayan of the Municipality of Sampaloc, Quezon, passed an ordinance imposing a
storage fee of ten centavos (PO. 10) for every 100 kilos of copra deposited in any bodega within the
Municipality’s jurisdiction. The Metropolitan Manufacturing Corporation (MMC), with principal
office in Makati, is engaged in the manufacture of soap, edible oil, margarine, and other coconut
oil-based products. It has a warehouse in Sampaloc, Quezon, used as storage space for the copra
purchased in Sampaloc and nearby towns before the same is shipped to Makati. MMC goes to court
to challenge the validity of the ordinance, demanding the refund of the storage fees it paid under
protest.
Is the ordinance valid? Explain your answer. (4%)
SUGGESTED ANSWER:
Yes. The municipality is authorized to impose reasonable fees and charges as a regulatory measure in an
amount commensurate with the cost of regulation, inspection and licensing (Section 147, LGC). In the case
at bar, the storage of copra in any warehouse within the municipality can be the proper subject of
regulation pursuant to the police power granted to municipalities under the Revised Administrative Code
or the “general welfare clause”. A warehouse used for keeping or storing copra is an establishment likely
to endanger the public safety or likely to give rise to conflagration because the oil content of the copra,
when ignited, is difficult to put under control by water and the use of chemicals is necessary to put out the
fire. It is, thus, reasonable that the Municipality impose storage fees for its own surveillance and lookout
(Procter & Gamble Philippine Manufacturing Corporation v. Municipality of Jagna, Province of Bohol, 94
SCRA 894 [1979]). (BAR 2009)
2. The City of Manila enacted an ordinance, imposing a 5% tax on gross receipts on rentals of space in
privately- owned public markets. BAT Corporation questioned the validity of the ordinance,
stating that the tax is an income tax, which cannot be imposed by the city government. Do you
agree with the position of BAT Corporation? Explain. (5%)
SUGGESTED ANSWER:
No. The tax imposed is not an income tax but a license tax or fee for the regulation of the business in which
the taxpayers are engaged, that is the leasing of spaces in privately-owned public markets. (Progressive
Development Corporation v. Quezon City, 172 SCRA 629 [1989]). The income tax imposed under the
National Internal Revenue Code which preempts the imposition by the City is one which is imposed on the
privilege enjoyed by a taxpayer in earning income and not a tax on business. (BAR 2008)
(6) Situs of tax collected
d. Taxing powers of barangays
e. Common revenue raising powers
(1) Service fees and charges
(2) Public utility charges
(3) Toll fees or charges
f. Community tax
6. Common limitations on the taxing powers of LGUs
1. XYZ Shipping Corporation is a branch of an international shipping line with voyages between
Manila and the West Coast of the U.S. The company’s vessels load and unload cargoes at the Port of
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Manila, albeit it does not have a branch or sales office in Manila. All the bills of lading and invoices
are issued by the branch office in Makati which is also the company’s principal office.
The City of Manila enacted an ordinance levying a 2% tax on gross receipts of shipping lines using
the Port of Manila.
Can the City Government of Manila legally impose said levy on the corporation? Explain. (3%)
SUGGESTED ANSWER:
No, Manila cannot legally levy the 2% Gross Receipts Tax on the shipping line, because taxes on the gross
receipts of transportation contractors and persons engaged in the transportation of passengers or freight
by hire and common carriers by air, land or water is a limitation on the exercise of taxing powers by local
government units (Sec, 133(f), LGC).
2. The Municipality of Argao, Province of Cebu passed a tax ordinance requiring all professionals
practicing in the municipality to pay a tax equivalent to two (2%) percent of their gross income. A
certified true copy of the ordinance was sent to the Secretary of Finance for review on 1 March
1989 and was received by him on the same day. On 15 August 1989, even as the tax ordinance
remained unacted upon by the Secretary of Finance, the municipality started collecting the tax in
question. The members of the Philippine Bar in the municipality questioned the legality of the
ordinance and sought the suspension of the collection of the tax but the municipality argued that
since the Secretary has not taken any action on the ordinance for more than one hundred twenty
days after his receipt thereof, the legality of the ordinance can no longer be questioned and
insisted on the collection of the tax.
Is the tax ordinance in question legal?
ANSWER:
No. the tax ordinance is not legal as the Local Tax Code allows provinces and cities, to the exclusion of
municipalities, to impose an annual occupation tax on all persons engaged in the exercise or practice of
their profession or calling in specified amounts which in the case of lawyers is P75.00 per annum (Secs. 11
and 12 in relation to Sec. 23, Local Tax Code). A person authorized to practice his profession or calling
shall pay the tax to the province where he practices his profession or calling or maintains his office.
No local government unit can impose a tax on income (Sec. 5, Local Tax Code).
Is the Municipality correct in insisting on collecting the tax?
ANSWER:
No, the Municipality was incorrect in insisting on the collection of the tax. Once the tax on occupation is
paid as stated in paragraph (a), above, the lawyer is entitled to practice his profession or calling in all
parts of the Philippines without being subject to any other national or local tax, license or fee for the
practice of such profession or calling.
Will the inaction of the Secretary of Finance bar the professionals in the Municipality from
questioning the legality of that ordinance?
ANSWER:
The inaction of the Secretary of Finance does not bar the professionals in the Municipality from
questioning the legality of the ordinance. While it is true that the Secretary of Finance may himself
suspend the tax ordinance within a 120-day period from receipt thereof, his failure to do so, however, has
no preclusive effect on taxpayers who may be adversely affected by the ordinance. (BAR 1991)
7.

Collection of business tax
a. Tax period and manner of payment
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1. MNO Corporation was organized on July 1, 2006, to engage in trading of school supplies, with
principal place of business in Cubao, Quezon City. Its books of accounts and income statement
showing gross sales as follows:
July 1, 2006 to December 31, 2006
January 1, 2007 to June 30, 2007
JULY 1, 2007 TO DECEMBER 31, 2007

P 5,000,000
P10,000,000
PI 5,000,000

Since MNO Corporation adopted fiscal year ending June 30 as its taxable year for income tax
purposes, it paid its 2% business tax for fiscal year ending June 30, City Treasurer assessed the
corporation for deficiency business tax for 2007 based on gross sales of P25 million alleging that
local business taxes shall be computed based on calendar year.
Is the position of the city treasurer tenable? Explain. (3%)
SUGGESTED ANSWER:
Yes. The tax period for local taxes is generally the calendar year. (Section 165, LGC). (BAR 2008)
b. Accrual of tax
c. Time of payment
d. Penalties on unpaid taxes, fees or charges
e. Authority of treasurer in collection and inspection of books
8. Taxpayer’s remedies
1. Judicial
1. X, a taxpayer who believes that an ordinance passed by the City Council of Pasay is
unconstitutional for being discriminatory against him, want to know from you, his tax lawyer,
whether or not he can file an appeal. In the affirmative, he asks you where such appeal should be
made: the Secretary of Finance, or the Secretary of Justice, or the Court of Tax Appeals, or the
regular courts. What would your advice be to your client, X?
SUGGESTED ANSWER:
The appeal should be made with the Secretary of Justice. Any question on the constitutionality or legality
of a tax ordinance may be raised on appeal with the Secretary of Justice within 30 days from the effectivity
thereof. (Sec. 187, LGC; Hagonoy Market Vendor Association v. Municipality of Hagonoy, 376 SCRA 376 [
2002]). (BAR 2003)
2. Administrative
1. The Municipality of Argao, Province of Cebu passed a tax ordinance requiring all professionals
practicing in the municipality to pay a tax equivalent to two (2%) percent of their gross income. A
certified true copy of the ordinance was sent to the Secretary of Finance for review on 1 March
1989 and was received by him on the same day. On 15 August 1989, even as the tax ordinance
remained unacted upon by the Secretary of Finance, the municipality started collecting the tax in
question. The members of the Philippine Bar in the municipality questioned the legality of the
ordinance and sought the suspension of the collection of the tax but the municipality argued that
since the Secretary has not taken any action on the ordinance for more than one hundred twenty
days after his receipt thereof, the legality of the ordinance can no longer be questioned and
insisted on the collection of the tax.
What remedies are available to the taxpayer to enable him to question the legality of that
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ordinance?
ANSWER:
The taxpayer may pursue his remedies either administratively or Judicially. He may, as the case warrants,
file a formal protest with the Secretary of Finance or query with the Provincial Fiscal whose opinion is
appealable to the Secretary of Justice whose decision may be contested in the proper court. The other
remedy would be to file a special civil action for declaratory relief (if circumstances still warrant) or to
pay the tax and thereafter to file an action for refund within six (6) years after such payment.
ALTERNATIVE ANSWER:
On the basis of the facts of the problem. It would appear that the administrative remedy is no longer
available since there is already an attempt to enforce collection. The only remedy of the taxpayer is to pay
the tax and sue for its recovery in the ordinary court. (BAR 1991)
a. Periods of assessment and collection of local taxes, fees or charges
b. Protest of assessment
1. On May 15, 2009, La Manga Trading Corporation received a deficiency business tax assessment of
PI,500,000.00 from the Pasay City Treasurer. On June 30, 2009, the corporation contested the
assessment by filing a written protest with the City Treasurer.
On October 10, 2009, the corporation received a collection letter from the City Treasurer, drawing
it to file on October 25, 2009 an appeal against the assessment before the Pasay Regional Trial
Court (RTC).
A. Was the protest of the corporation filed on time? Explain. (3%)
SUGGESTED ANSWER:
The protest was filed on time. The taxpayer has the right to protest an assessment within 60 days from
receipt thereof (Sec. 195, LGC).
B. Was the appeal with the Pasay RTC filed on time? Explain. (3%)
SUGGESTED ANSWER:
The appeal was not filed on time. When an assessment is protested, the treasurer has 60 days within
which to The taxpayer has 30 days from receipt of the denial of the protest or from the lapse of the 60-day
period decide, whichever comes first, otherwise the assessment becomes conclusive and unappeallable.
Since no decision on the protest was made, the taxpayer should have appealed to the RTC within 30 days
from the lapse of the period to decide the protest (Sec. 195, LGC).
9.

c. Claim for refund of tax credit for erroneously or illegally collected tax, fee or charge
Civil remedies by the LGU for collection of revenues
a. Local government’s lien for delinquent taxes, fees or charges
b. Civil remedies, in general

1. Give the remedies available to local government units to enforce the collection of taxes, fees, and
charges?
ANSWER:
The remedies available to the local government units to enforce collection of taxes, fees, and charges are:
(a) Administrative remedies of distraint of personal property of whatever kind whether tangible or
intangible, and levy of real property and interest therein; and
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(b) Judicial remedy by institution of an ordinary civil action for collection with the regular courts of
proper jurisdiction. (BAR 1997)
(1) Administrative action
(2) Judicial action
B. Real property taxation
1. Fundamental principles
1. Give at least two (2) fundamental principles governing real property taxation, which are
limitations on the taxing power of local governments insofar as the levying of the realty tax is
concerned. (2%)
SUGGESTED ANSWER:
Two (2) fundamental principles governing real property taxation are:
1) The appraisal must be at the current and fair market value; and
2) Classification for assessment must be on the basis of actual use. (Sec. 198, Local Government Code)
ALTERNATIVE ANSWER:
The examinee should be given credit if he chooses the above two (2) or any two (2) of those enumerated
below:
1) Assessment must be on the basis of uniform classification;
2) Appraisal, assessment, levy and collection shall not be let to private persons; and
3) Appraisal and assessment must be equitable. (Sec. 198, Local Government Code) (BAR 2000)
2. State the fundamental principles underlying real property taxation in the Philippines.
ANSWER:
The following are the fundamental principles governing real property taxation:
(a) Real property shall be appraised at its current and fair market value;
(b) Real property shall be classified for assessment purposes on the basis of its actual use:
(c) Real property shall be assessed on the basis of a uniform classification within each local government
unit;
(d) The appraisal, assessment, levy, and collection of real property tax shall not be let to any private
person; and
(e) The appraisal and assessment of real property shall be equitable. (BAR 1997)
2.
3.

Nature of real property tax
Imposition of real property tax

1. Under Article 415 of the Civil Code, in order for machinery and equipment to be considered real
property, the pieces must be placed by the owner of the land and, in addition, must tend to directly
meet the needs of the industry or works carried on by the owner. Oil companies install
underground tanks in the gasoline stations located on land leased by the oil companies from the
owners of the land where the gasoline stations [are] located. Are those underground tanks, which
were not placed there by the owner of the land but which were instead placed there by the lessee
of the land, considered real property for purposes of real property taxation under the local
Government Code? Explain.
SUGGESTED ANSWER:
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Yes. The properties are considered as necessary fixtures of the gasoline station, without which the
gasoline station would be useless. Machinery and equipment installed by the lessee of leased land is not
real property for purposes of execution of a final judgment only. They are considered as real property for
real property tax purposes as “other improvements to affixed or attached real property under the
Assessment Law and the Real Property Tax Code. (Cattex v. Central Board of Assessment Appeals, 114
SCRA 296 [1982]). (BAR 2003)
2. Aside from the basic real estate tax, give three (3) other taxes which may be imposed by provincial
and city governments as well as by municipalities in the Metro Manila area. (3%)
SUGGESTED ANSWER:
The following real property taxes aside from the basic real property tax may be imposed by provincial and
city governments as well as by municipalities in the Metro Manila area:
1. Additional levy on real property for the Special Education Fund (Sec. 235, LGC);
2. Additional Ad-valorem tax on Idle lands (Sec. 236, LGC); and
3. Special levy (Sec, 240),
Note:
The question is susceptible to dual interpretation because it is asking for three other taxes and not three
other real property taxes. Accordingly, an alternative answer should be considered and given full credit.
ALTERNATIVE ANSWER:
The following taxes, aside from basic real estate tax, may be imposed by Provincial Government:
a. Printer’s or publisher’s tax
b. Franchise Tax
c. Professional tax
City Government - may levy taxes which the province or municipality are authorized to levy (Sec. 151,
LGC)
a. Printer’s or publisher’s tax
b. Franchise tax
c. Professional tax
Municipalities in the Metro Manila Area - may levy taxes at rates which shall not exceed by 50% the
maximum rates prescribed in the Local Government Code.
a. Annual fixed tax on manufacturers, assemblers, repackers, processors, brewers, distillers,
rectifiers and compounders of liquors, distilled spirits, and wines or manufacture of any
article of commerce of whatever kind or nature;
b. Annual fixed tax on wholesalers, distributors, or dealers in any article of commerce of
whatever kind or nature;
c. Percentage tax on retailers
Note:
Other taxes may comprise the enumeration because many other taxes are authorized to be imposed by
LGUs. (BAR 2002)
3. Under Article 415 of the Civil Code, in order for machinery and equipment to be considered real
property, they must be placed by the owner of the land and, in addition, must tend to directly meet
the needs of the industry or works carried on by the owner. Oil companies, such as Caltex and
Shell, install underground tanks in the gasoline stations located on land leased by the oil
companies from others. Are those underground tanks which were not placed there by the owner of
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the land but which were instead placed there by the lessee of the land, considered real property for
purposes of real property taxation under the Local Government Code? Explain your answer. (5%)
SUGGESTED ANSWER:
Yes. The underground tanks although installed by the lessee. Shell and Caltex, are considered as real
property for purposes of the imposition of real property taxes. It is only for purposes of executing a final
judgment that these machinery and equipment, installed by the lessee on a leased land, would not be
considered as real property. But in the imposition of the real property tax, the underground tanks are
taxable as necessary fixtures of the gasoline station without which the gasoline station would not be
operational. (Caltex Phils., Inc v. CBAA, 114 SCRA 296). (BAR 2001)
4. May local governments impose an annual realty tax in addition to the basic real property tax on
idle or vacant lots located in residential subdivisions within their respective territorial
jurisdictions? (3%)
SUGGESTED ANSWER:
Not all local government units may do so. Only provinces, cities, and municipalities within the Metro
Manila area (Sec. 232, Local Government Code),may impose an ad valorem tax not exceeding five percent
(5%) of the assessed value (Sec.236,
Ibid.) of idle or vacant residential lots in a subdivision, duly
approved by proper authorities regardless of area. (Sec. 237, Ibid.) (BAR 2000)
5. In view of the street widening and cementing of roads and the improvement of drainage and
sewers in the district of Ermita, the City Council of the City of Manila passed an ordinance imposing
and collecting a special levy on lands in the district. Jose Reyes, a landowner and resident of
Ermita, submitted a protest against the special levy fifteen (15) days after the last publication of
the ordinance alleging that the special levy was exorbitant since the rate thereof was more than
the maximum rate of two (2%) percent of the assessed value of the real properties allowed by
Section 39 of P.D. 464, as amended.
Assuming that Jose Reyes is able to prove that the rate of the special levy is more than the
aforesaid percentage limitation of 2%, will his protest prosper?
ANSWER:
The special levy under the Real Property Tax Code on lands, specially benefited by the proposed
infrastructure, may not exceed sixty per cent (60%) of the cost of said improvement. All lands comprised
within the district benefited are subject to the special levy except lands exempt from the real property tax
(Sec. 47. RPT). The protest shall be filed not later than 30 days after the publication of the ordinance and
may be submitted to the City Sanggunian signed by a majority of the landowners affected by the proposed
work. If no such protest is filed in the manner above specified, the city ordinance shall become final and
effective. The levy imposed under the ordinance should be within the limit of sixty percent (60%) of the
total cost of the proposed improvement. The rate of two percent (2%) of the assessed value under Sec. 39
of P.D. 464refers to the real property tax and not to special levies. (BAR 1991)
a. Power to levy real property tax
1. A city outside of metro manila plans to enact an ordinance that will impose a special levy on idle
lands located in residential subdivisions within its territorialjurisdiction in addition to the basic
real property tax. If the lot owners of a subdivision located in the said city seek your legal advice on
the matter, what would your advice be? Discuss. (5%)
SUGGESTED ANSWER:
My advice would be that the city's plan to enact an ordinance that will impose such special levy on idle
lands is not legally allowed, unless these lands are specially benefited by a public works projects or
improvements funded by the city government. (Sec. 240, Local Government Code). I will likewise advise
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them that before the city council could enact an ordinance imposing a special levy, it shall conduct a public
hearing thereon; notify in writing the owners of the real property to be affected or the persons having
legal interest therein as to the date and place thereof and afford the latter the opportunity to express their
positions or objections relative to the proposed ordinance. (Sec. 242, Local Government Code).
ANOTHER SUGGESTED ANSWER:
I would advise the lot owners that the imposition is valid because a city, even if it is outside Metro Manila,
may levy an annual tax on idle lands at the rate not exceeding five percent (5%) of the assessed value of
the property which shall be in addition to the basic real property tax. (Sec. 236, Local Gov't. Code) I would
likewise advise them that the levy may apply to residential lots, regardless of land area, in subdivisions
duly approved by proper authorities, the ownership of which has been transferred to individual owners,
who shall be liable for the additional tax. (last par., Sec. 237, ibid.)
Finally, I would advise them to construct or place improvements on their idle lands by making valuable
additions to the property or ameliorations in the land’s conditions so the lands would not be considered as
idle. (Sec. 199(m), ibid.) In this manner their properties would not be subject to the ad valorem tax on idle
lands.
Note:
The special levy referred to in the problem might be interpreted by the examinee in two ways: (l) An
additional Ad valorem tax on idle lands (Sec. 236, LGC) or: (2) Special levy by Local Government Units
(Sec. 240, LGC). This is so because both provisions fall under Chapter V of the local Government Code
dealing with Real Property Taxation. The caption or heading used in Chapter V upon which both
impositions fall is "Special Levies on Real Property”. Hence, it is requested that any of foregoing suggested
answers should be given full credit. (BAR 2005)
b. Exemption from real property tax
1. A inherited a two-storey building in Makati from his father, a real estate broker in the ‘bOs. A
group of Tibetan monks approached A and offered to lease the building in order to use it as a
venue for their Buddhist rituals and ceremonies. A accepted the rental of PI million for the whole
year.
The following year, the City Assessor issued an assessment against A for non-payment of real
property taxes.
Is the assessor justified in assessing A’s deficiency real property taxes? Explain. (3%)
SUGGESTED ANSWER:
No. The property is exempt from real property tax by virtue of the beneficial use thereof by the Tibetan
monks for their religious rituals and ceremonies. A property that is actually, directly and exclusively used
for religious purposes is exempt from the real property tax (Sec. 234, LGC; Sec. 28(3), Article IV, Phil.
Constitution). The test of exemption from the tax is not ownership but the beneficial use of the property
(City of Baguio v. Busuego, L-29772, Sept. 18, 1980).
2. What properties are exempt from the real property tax? 5%
SUGGESTED ANSWER:
The following properties are exempt from the real property tax:
a. Real property owned by the Republic of the Philippines or any of its political subdivisions except when
the beneficial use thereof has been granted for consideration or otherwise to a taxable person;
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b. Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or
religious cemeteries, and all lands, buildings, and improvements actually, directly and exclusively used
for religious, charitable or educational purposes;
c. All machineries and equipment that are actually, directly and exclusively used by local water utilities
and government-owned or controlled corporations engaged in the supply and distribution of water
and/or generation and transmission of electric power;
d. All real property owned by duly registered cooperatives as provided for under R.A. 6938; and
e. Machinery and equipment used for pollution control and environmental protection. [Sec. 234, LGC]
(BAR 2006)
3. The Constitution provides “charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, and non-profit cemeteries and all lands, buildings, and improvements actually,
directly and exclusively used for religious, charitable or educational purposes shall be exempt
from taxation." This provision exempts charitable institutions and religious institutions from what
kind of taxes? Choose the best answer. Explain. 5%
f.
g.
h.
i.
j.

from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and real property tax
from income tax only
from value-added tax only
from real property tax only
from capital gains tax only

SUGGESTED ANSWER:
I choose (d), from real property tax only. This is the connotation of the phrase “and all lands, buildings and
improvements" thereby limiting the exemption to real property taxes only (CIRv. CA, 298 SCRA 83 [1998];
Lladoc v. Commissioner, 14 SCRA 292 [1967]; Hodges v. Municipal Board of Iloilo City, 19 SCRA 28
[1965]). (BAR 2006)
4. The Roman Catholic Church owns a 2-hectare lot in a town in Tarlac province. The southern side
and middle part are occupied by the Church and a convent, the eastern side by a school run by the
Church itself, the southeastern side by some commercial establishments, while the rest of the
property, in particular the northwestern side, is idle or unoccupied.
May the Church claim tax exemption on the entire land? Decide with reasons. (5%)
SUGGESTED ANSWER:
No. The portions of the land occupied and used by the church, convent and school run by the church are
exempt from real property taxes while the portion of the land occupied by commercial establishments and
the portion, which is idle, are subject to real property taxes. The “usage” of the property and not the
“ownership" is the determining factor whether or not the property is taxable. [Lung Center of the
Philippines v. Q.C., 433 SCRA 119 (2004)]. (BAR 2005)
5. Under the Local Government Code, what properties are exempt from real property taxes? (5%)
SUGGESTED ANSWER:
The following properties are exempt from real property taxes: (Sec. 234, LGC).
1. Real property owned by the Republic of the Philippines or any of its political subdivisions except
when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable
person;
2. All lands, buildings and improvements actually, directly, and exclusively used for religious,
charitable or educational purposes by charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, nonprofit or religious cemeteries;
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3. All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power;
4. All real property owned by duly registered cooperatives as provided for under R.A. No. 6938; and
5. Machinery and equipment used for pollution control and environmental protection. (BAR 2002)
6. Article VII, Section 28 (3) of the 1987 Philippine Constitution provides that charitable institutions,
churches and personages or covenants appurtenant thereto, mosques, non-profit cemeteries and
all lands, buildings and improvements actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from taxation.
To what kind of tax does this exemption apply? (2%)
SUGGESTED ANSWER:
This exemption applies only to property taxes. What is exempted is not the institution itself but the lands,
buildings and improvements actually, directly and exclusively used for religious, charitable and
educational purposes. (Commissioner of Internal Revenue v. Court of Appeals, et aL, G.R. No. 124043,
October 14, 1998). (
Is proof of actual use necessary for tax exemption purposes under the Constitution? (3%)
SUGGESTED ANSWER:
Yes, because tax exemptions are strictly construed against the taxpayer. There must be evidence to show
that the taxpayer has complied with the requirements for exemption. Furthermore, real property taxation
is based on use and not on ownership, hence the same rule must also be applied for real property tax
exemptions. BAR 2000)
7. The Constitution exempts from taxation charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques and non-profit cemeteries and lands, buildings and improvements
actually, directly and exclusively used for religious, charitable and educational purposes.
Mercy Hospital is a 100-bed hospital organized for charity patients. Can said hospital claim
exemption from taxation under the above-quoted constitutional provision? Explain.
ANSWER:
Yes. Mercy Hospital can claim exemption from taxation under the provision of the Constitution, but only
with respect to real property taxes provided that such real properties are used actually, directly and
exclusively for charitable purposes. (BAR 1996)
4.

Appraisal and assessment of real property tax
a. Rule on appraisal of real property at fair market value
b. Declaration of real property
c. Listing of real property in assessment rolls
d. Preparation of schedules of fair market value
(1) Authority of assessor to take evidence
(2) Amendment of schedule of fair market value
e. Classes of real property
f. Actual use of property as basis of assessment
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1. Republic Power Corporation (RPC) is a government- owned and controlled corporation engaged in
the supply, generation and transmission of electric power. In 2005, in order to provide electricity
to Southern Tagalog provinces, RPC entered into an agreement with Jethro Energy Corporation
(JEC), for the lease of JEC’s power barges which shall be berthed at the port of Batangas City. The
contract provides that JEC shall own the power barges and the fixtures, fittings, machinery, and
equipment therein, all of which JEC shall supply at its own cost, and that JEC shall operate, manage
and maintain the power barges for the purpose of converting the fuel of RPC into electricity. The
contract also stipulates that all real estate taxes and assessments, rates and other charges, in
respect of the power barges, shall be for the account of RPC.
In 2007, JEC received an assessment of real property taxes on the power barges from the Assessor
of Batangas City. JEC sought reconsideration of the assessment on the ground that the power
barges are exempt from real estate taxes under Section 234 [c] of R.A. 7160 as they are actually,
directly and exclusively used by RPC, a government-owned and controlled corporation.
Furthermore, even assuming that the power barges are subject to real property tax, RPC should be
held liable therefore, in accordance with the terms of the lease agreement. Is the contention of JEC
correct? Explain your answer. (4%)
SUGGESTED ANSWER:
The contention of JEC is not correct. The owner of the power barges is JEC which is required to operate,
manage and maintain the power barges for the purpose the claim that RPC, a government-owned and
controlled corporation engaged in the supply, generation and transmission of electric power, is the actual,
direct and exclusive user of the barge, hence, does not fall within the purview of the exempting provision
of Section 234[c] of R.A. 7160. Likewise, the argument that RPC should be liable to the real property taxes
consonant with the contract is devoid of merit. The liability for the payment of the real estate taxes is
determined by law and not by the agreement of the parties (FELS Energy Inc. P. The Province of Batangas,
516 SCRA 186 [2007]). (BAR 2009)
2. The real property of Mr. and Mrs Angeles, situated in a commercial area in front of the public
market, was declared in their Tax Declaration as residential because it had been used by them as
their family residence from the time of its construction in 1990. However, since January 1997,
when the spouses left for the United States to stay there permanently with their children, the
property has been rented to a single proprietor engaged in the sale of appliances and agriproducts. The Provincial Assessor reclassified the property as commercial for tax purposes
starting January 1998. Mr. and Mrs Angeles appealed to the Local Board of Assessment Appeals,
contending that the Tax Declaration previously classifying their property as residential is binding.
How should the appeal be decided? (5%)
SUGGESTED ANSWER:
The appeal should be decided against Mr. and Mrs. Angeles. The law focuses on the actual use of the
property for classification, valuation and assessment purposes regardless of ownership. Section 217 of the
Local Government Code provides that “real property shall be classified, valued, and assessed on the basis
of its actual use regardless of where located, whoever owns it, and whoever uses if’.
Whenever the decision of the Collector of Customs is adverse to the government, it is automatically
elevated to the Commissioner for review and, if it is affirmed by him, it is automatically elevated to the
Secretary of Finance for review. (BAR 2002)
g. Assessment of real property
(1) Assessment levels
(2) General revisions of assessments and property classification
(3) Date of effectivity of assessment or reassessment
(4) Assessment of property subject to back taxes
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(5) Notification of new or revised assessment
h. Appraisal and assessment of machinery
5. Collection of real property tax
a. Date of accrual of real property tax and special levies
b. Collection of tax
(1) Collecting authority
(2) Duty of assessor to furnish local treasurer with assessment rolls
(3) Notice of time for collection of tax
c. Periods within which to collect real property tax
d. Special rules on payment
(1) Payment of real property tax in installments
(2) Interests on unpaid real property tax
(3) Condonation of real property tax
e. Remedies of LGUs for collection of real property tax
(1) Issuance of notice of delinquency for real property tax payment
1. Quezon City published on January 30, 2006 a list of delinquent real property taxpayers in 2
newspapers of general circulation and posted this in the main lobby of the City Hall. The notice
requires all owners of real properties in the list to pay the real property tax due within 30 days
from the date of publication, otherwise the properties listed shall be sold at public auction.
Joachin is one of those named in the list. He purchased a real property in 1996 but failed to register
the document of saile with the Register of Deeds and secure a new real property tax declaration in
his name. He alleged that the auction sale of his property is void for lack of due process considering
that the City Treasurer did not send him personal notice. For his part, the City Treasurer maintains
that the publication and posting of notice are sufficient compliance with the requirements of the
law.
1.

If you were the judge, how will you resolve this issue? 2.5%

2. Assuming Joachin is a registered owner, will your answer be the same? 2.5%
SUGGESTED ANSWER:
1. I will resolve the issue in favor of the City Treasurer. For purposes of the real property tax, the
registered owner of the property is deemed the taxpayer. Hence, only the registered owner is entitled
to a notice of tax delinquency and other proceedings relative to a tax sale (Talusan v. Tayag and
Hernandez, 356 SCRA 263 [2001]). Not being the registered owner of the property, Joachin cannot
claim to have been deprived of such notice, in fact, he was not entitled to it. He brought the misfortune
upon himself, because he did not register the Deed of Sale with the Register of Deeds upon its
execution or secure a tax declaration in his name. He did not take the necessary steps to protect and
legitimize his interest. The auction sale of his property is, therefore, valid.
2.

No, my answer will not be the same. The law requires that a notice of the auction sale must be
properly sent to the registered owner. A mere publication of the notice of delinquency would not
suffice, considering that the procedure in tax sales is in personam. An auction sale, although preceded
by advertisement and publication but without an actual notice to the delinquent taxpayer, is void. (Tan
v. Bantegui, 473 SCRA 663 [2005]; Estate of Mercedes Jacob v. CA, 283 SCRA 474 [19971). (BAR 2006)
(2) Local government’s lien
(3) Remedies in general

1. Ms. Edna Dinoso is the registered owner of a residential lot with a two-story house situated in
Naga City. The lot with an area of328 sq. meter is described and covered by TCT No. 4739 of the
Registry of Deeds of Naga City.
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On September 12. 1977, a 115 sq. meter portion of Edna’s property was expropriated by the
Republic of the Philippines for the sum of P6.700.00 representing the assessed value of the
aforesaid portion: This amount was deposited by the Government in Edna’s account.
For almost ten (10) years, Edna failed to pay her real estate taxes on the same property. Thus, on
November 5, 1977, her property was sold at public auction by the City Treasurer of Naga City to
satisfy her real estate tax delinquencies amounting to P5,800.00. The highest bidder for the
property was Angel Chua.
Edna was not present at the public auction although she later admitted having received the
notice of hearing for the petition for entry of a new certificate of title by Angel Chua. (Both the
auction sale and the final bill of sale were annotated at the back of TCT No. 4739 by the Register
of Deeds.)
On March 15, 1979, Edna filed a complaint to annul the auction sale which was denied by the CFI
Judge of Naga City. In fact, the CFI Judge ordered the TCT # 4739 of Edna be cancelled and that a
new title be issued to Angel Chua.
On appeal, the Court of Appeals affirmed the CFI decision in toto. Edna then elevated the case to
the Supreme Court citing several grave errors of law, among which are:
That her tax delinquencies (involving P5,800.00) for non-payment of real estate taxes were
offset by the sum of P6,700.00which the government of the Philippines owed her. She claims
that her tax delinquencies have been extinguished by legal compensation:
2) That the price of P5,800.00 paid by Angel Chua was grossly inadequate and that because of its
inadequacy, the same is tantamount to deprivation of property without due process of law;
3) That the public auction made on her property is void.
1)

Discuss the merits of the appeal.
ANSWER:
1) The decision of the Court of Appeals affirming the CFI decision must be affirmed.
On the procedural aspect, it has not been shown, as required under the Real Property Tax Code that
plaintiff has paid the amount for which the real property has been sold plus interest.
On the claim of extinction of tax liability by legal compensation, there is jurisprudence to the effect
that the doctrine of equitable recoupment does not apply in this Jurisdiction. Assuming it does, the
facts of the case bear out that the Government does not owe the plaintiff any amount.
2) On the claim that the price for the property was grossly inadequate, the Real Property Tax Code

specifically mentions that the sale of real property at public auction is “to satisfy all the taxes and
penalties due and costs of sale" (Sec. 73). Thus, the selling price is based not on the fair market value
of the property sold at public auction but the amount of real property taxes due thereon. In any case,
the delinquent taxpayer is given one year from the date of registration of the sale within which to
redeem the property by paying the taxes due plus costs and interest.

3)

On the claim that the public auction made on the property is void, the Real Property Tax Code
provides (Sec. 83,2nd par.) that a court shall not declare a sale invalid due to irregularities in the
proceedings unless such irregularities have impaired the substantial rights of the taxpayer. In the case
at bar, the plaintiff received a notice of hearing for the petition for entry of a new certificate of title
during which she could have questioned any irregularity in the conduct of the sale. (BAR 1992)
(4) Resale of real estate taken for taxes, fees or charges
(5) Further levy until full payment of amount due
6. Refund or credit of real property tax
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a. Payment under protest
b. Repayment of excessive collections
7. Taxpayer’s remedies
a. Contesting an assessment of value of real property
(1) Appeal to the Local Board of Assessment Appeals
(2) Appeal to the Central Board of Assessment Appeal
1. A Co., a Philippine corporation. Is the owner of machinery, equipment and fixtures located at its
plant in Muntinlupa City. The City Assessor characterized all these properties as real properties
subject to the real property tax. A Co. appealed the matter to the Muntinlupa Board of Assessment
Appeals. The Board ruled in favor of the City. In accordance with RA 1125 (An Act creating the
Court of Tax Appeals). A Co. brought a petition for review before the CTA to appeal the decision of
the City Board of Assessment Appeals.
Is the Petition of Review proper? Explain. (5%)
SUGGESTED ANSWER:
No. The CTA is devoid of jurisdiction to entertain appeals from the decision of the City Board of
Assessment Appeals. Said decision is instead appealable to the Central Board of Assessment Appeals,
which under the Local Government Code, has appellate jurisdiction over decisions of Local Board of
Assessment Appeals. (Caltex Phils. Inc. v. Central Board of Assessment Appeals, L- 50466. May 31, 1982)
(BAR 1999)
(3) Effect of payment of tax
b. Payment of real property tax under protest
1. On February 13, 1969, X obtained a loan of P800.000.00 from the GSIS secured by the mortgage of
a parcel of land including its improvements. X failed to pay the loan. The lot was foreclosed and
sold at public auction to the GSIS as the highest bidder. X failed to redeem the lot and the GSIS
consolidated its title to the lot in 1977. In 1979, however, the GSIS allowed X to repurchase the lot.
After assessment by the City Assessor, the City Treasurer of Manila required X to pay the real
estate taxes due on the lot for the years 1977 and 1978. X paid under protest. On September 5,
1979, X sent a demand letter to the City Treasurer for refund. The demand was refused.
X then filed with the Regional Trial Court a complaint against the City of Manila for a “sum of
money and/or recovery of real estate taxes paid under protest." The City questioned the
jurisdiction of the Court. Decide.
ANSWER:
Section 62 of the Real Property Tax Code provides that:
"Sec. 62.Payment under protest. —
a)

When a taxpayer desires for any reason to pay his tax under protest, he shall indicate the amount or
portion thereof he is contesting and such protest shall be annotated on the tax receipts by writing
thereon the words ‘paid under protest.' Verbal protests shall be confirmed in writing, with a
statement of the ground, therefor, within thirty days. The tax may be paid under protest, and in such
case it shall be the duty of the Provincial, City or Municipal Treasurers to annotate the ground or
grounds therefor on the receipt.

b)

In case of payments under protest, the amount or portion of the tax contested shall be held in trust by
the treasurer and the difference shall be treated as revenue.

c)

In the event that the protest is finally decided in favor of the government the amount or portion of the
tax held in trust by the treasurer shall accrue to the revenue account, but if the protest shall be
Page | 216

decided finally in favor of the protestant. the amount or portion of the tax protested or applied as tax
credit to any other existing or future tax liability of the said protestant." (Emphasis Supplied)
If the owner is not satisfied with the action of the provincial or city assessors in the assessment of his
property, he may file an appeal to the Board of Assessment Appeals of the province on city, within sixty
(60) days from the receipt of the decision (Section 30 of the Real Property Tax Code).
If the owner is not satisfied with the decision of the Board of Assessment Appeals, he may appeal the said
decision to the Central Board of Assessment Appeals within thirty (30) days after the receipt of the
decision (Sections 34 and 36 of the Real Property Tax Code).
As enunciated in the case of Victorias Milling Co., Inc., vs. Court of Tax Appeals 22 SCRA 1008, 1001
(1968):
"It Is settled in our Jurisdiction that where an assessment is illegal and void, the remedy of a taxpayer,
who has already paid the realty tax under protest, is to sue for refund in the competent court of first
instance. On the other hand, where the assessment is merely erroneous, his recourse is to file an appeal in
the Provincial Board of Assessment Appeals within 60 days from receipt of the assessment."
In view of the foregoing, the legal recourse of X is to appeal the decision of the City Treasurer to the Board
of Assessment appeal, and not to file an action for sum of money and/or recovery of real estate taxes.
Hence, the Regional Trial Court has jurisdiction over the complaint filed by X.
ALTERNATIVE ANSWERS:
a) The Regional Trial Court has Jurisdiction. It has been held that the regular courts have jurisdiction
over actions for refund of real estate taxes paid under protest on the ground of solution indebiti
b)

The RTC does not have jurisdiction over the matter. Section 30 of PD. No. 464 (The Real Property Tax
Code) prescribes the proper remedy of the taxpayer. It requires X, who is not satisfied with the action
of the city assessor, to appeal his case to the Local Board of Assessment Appeal within sixty days from
date or receipt by X of the written notice denying his request for refund of real property taxes paid.
(BAR 1993)
(1)
(2)
(3)
(4)
(5)

File protest with local treasurer
Appeal to the Local Board of Assessment Appeals
Appeal to the Central Board of Assessment Appeals
Appeal to the CTA
Appeal to the Supreme Court

IV. Tariff and Customs Code of 1978, as amended

A. Tariff and duties, defined
B. General rule: all imported articles are subject to duty.
1. Importation by the government taxable
C. Purpose for imposition
D. Flexible tariff clause

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1. What do you understand by the term “flexible tariff clause" as used in the Tariff and Customs Code?
(5%)
SUGGESTED ANSWER:
The term "flexible tariff clause "refers to the authority given to the President to adjust tariff rates under
Section 401 of the Tariff and Customs Code, which is the enabling law that made effective the delegation of
the taxing power to the President under the Constitution.
Note:
It is suggested that if the examinee cites the entire provision of Sec. 401 of the Tariff Customs Code, he
should also be given full credit. (BAR 2001)
2. In view of the unfavorable balance of payment condition and the increasing budget deficit, the
President of the Philippines. upon recommendation of the National Economic and Development
Authority, issues during a recess of Congress an Executive Order imposing an additional duty on all
imports at the rate of ten (10%) percent ad valorem. The Executive Order also provides that the
same shall take effect immediately. Ricardo San Miguel, an importer, questions the legality of the
Executive Order on the grounds that only Congress has the authority to fix the rates of import
duties and, in any event, such an Executive Order can take effect only thirty (30) days after
promulgation and the President has no authority to shorten said period.
Are the objections of Mr. San Miguel tenable?
ANSWER:
No. the objections are not tenable as the Executive Order cannot take effect “immediately". Being an
“external” law and having the effect of law, the Executive Order cannot become effective without
publication, a requirement of due process (Tanada vs. Tuvera, 136 SCRA27; Executive Order No. 202).
ALTERNATIVE ANSWER:
Under the Flexible Tariff Clause (Sec. 401, Tariff and Customs Code), any order issued by the President
thereunder can generally take effect only thirty (30) days after its issuance. In cases however of an order
imposing additional import duties, the law provides that the same can take effect immediately. (BAR
1991)
E. Requirements of importation
1. Beginning and ending of importation
1. When does importation begin and when does it end?
ANSWER:
Importation begins from the time the carrying vessel or aircraft enters Philippine territorial jurisdiction
with the intention to unload therein and ends at the time the goods are released or withdrawn from the
customhouse upon payment of the customs duties or with legal permit to withdraw (Viduya vs. Berdiago,
73 SCRA 553). (BAR 1995)
2.

Obligations of importer
a. Cargo manifest
b. Import entry
c. Declaration of correct weight or value
d. Liability for payment of duties
e. Liquidation of duties
f. Keeping of records
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F. Importation in violation of tax credit certificate
1. Smuggling
2. Other fraudulent practices
G. Classification of goods
1. Taxable importation
1. JKL Corporation is a domestic corporation engaged in the importation and sale of motor vehicles in
the Philippines and is duly registered with the Subic Bay Metropolitan Authority (SBMA). In
December 2007, it imported several second-hand motor vehicles from Japan and Korea, which it
stores in a warehouse in Subic Bay. It sold these motor vehicles in April 2008, to persons residing
in the customs territory.
A) Are the importations of motor vehicles from abroad subject to customs duties and value added
taxes? Explain. (4%)
SUGGESTED ANSWER:
a) No. The importation from abroad to the Subic Bay Freeport Zone is exempt from customs duties and
value-added taxes. The Freeport Zone is an extension of a foreign territory so that the vehicles
imported while still within its secured perimeter is not subject to Philippine taxes. (RMC No. 50-2007;
Seagate Technology Inc., v. Commissioner, 451 SCRA 132 [2005]).
b) If they are taxable, upon sale to custom territory, when must the duties and taxes be paid?
What are the bases for and purposes of computing customs duties and VAT? To whom must the
duties and VAT be paid? Explain. (3%)
SUGGESTED ANSWER:
b) When these motor vehicles are sold to the customs territory, the duties and taxes must be paid before
they are physically brought out of the Freeport Zone. The introduction of the motor vehicles to the
customs territory is considered as technical importation subject to the customs duties and VAT. The
tax base for the customs duties is the transaction value while for VAT purposes, the tax base is the
value used in computing customs duties plus customs duties, excise taxes and other charges incident
to importation. (Section 107 (A), NIRC). These taxes on importation must be paid to the Bureau of
Customs before the Authority to Release Imported Goods will be issued by the BIR. (Revenue
Regulations No. 16-2005). (BAR 2008)
2. Dagat-dagatan Shipping Corp. (DSC) brought into the country two (2) non-propelled foreign
barges which DSC chartered for use in the Philippine coastwise trade under a Temporary
Certificate of Philippine Registration, to be returned to the foreign owner upon termination of the
charter period but not beyond 1999, pursuant to P.D. No. 760, as amended. Upon their arrival, the
barges were subjected to duty by the Bureau of Customs. DSC refused to pay any customs duty
contending that the charter or lease of the barges, which will be returned to the foreign owner
when the charter expires, is not an importation and, therefore cannot be subjected to any customs
duty.
Is DSC's refusal with or without legal basis?
ANSWER:
DSC’s refusal is without legal basis. The term imposition includes the entry into the country of any article
from a foreign country. The fact that imported goods are to be re-exported does not mean that the
customs duties may not be imposed, although, in certain cases and subject to limitations prescribed by the
Tariff and Customs Code a drawback may be available to the taxpayer so as to be able to obtain their
refund. An example of which are articles which are used in the manufacture of products for export within
three (3) years after the importation.
Page | 219

On what is the dutiable value of any imported article based?
ANSWER:
The dutiable value of imported articles is the home consumption cost value, i.e., the cost or fair market
value or price of the imported articles In wholesale quantities in the principal market of the exporting
country or country of origin, including expenses collected from importation such as insurance, freight,
packaging, loading and unloading charges but excluding internal excise taxes. In case such value is
unascertainable, the Commissioner may also determine the home consumption value from any reliable
and available data (Sec. 20l.TCC, as amended: Commissioner vs. Court of Tax Appeals, G.R No. 72069,21
May 1988). (BAR 1991)
2.
3.

Prohibited importation
Conditionally-free importation

1. Jacob, after serving a 5-year tour of duty as military attache in Jakarta, returned to the Philippines
bringing with him his personal effects including a personal computer and a car. Would Jacob be
liable for taxes on these items? Discuss fully. (5%)
SUGGESTED ANSWER:
No. Jacob will be exempted provided he complies with the requirements under Sec. 105 of the Tariff and
Customs Code.
ANOTHER SUGGESTED ANSWER:
No. Jacob is entitled to the tax and duty-free importation of his personal effects, personal computer and
car provided the following requirements are met:
a) The car must have been ordered or purchased prior to the receipt by the Philippine mission or
consulate in Jakarta of Jacob's recall order;
b) The car is registered in Jacob's name;
c) The exemption shall apply to the value of the car;
d) The exemption shall apply to the aggregate value of his personal and household effects (including the
personal computer) not exceeding thirty percentum (30%) of the total amount received by Jacob as
salary and allowances during his assignment in Jakarta, but not to exceed four (4) years;
e) Jacob must not have availed of the exemption more oftener than once every four years, (last par.. Sec.
105, Tariff and Customs Code) (BAR 2005)
2. X and his wife, Y, Filipinos living in the Philippines, went on a three-month pleasure trip around
the world during the months of June, July and August 2002. In the course of their trip, they
accumulated some personal effects which were necessary, appropriate and normally used in
leisure trips, as well as souvenirs in non-commercial quantities. Are they “returning residents” for
purposes of Section 105 of the Tariff and Customs Code? Explain.
SUGGESTED ANSWER:
No. The term “returning residents” refers to nationals who have stayed in a foreign country fora period of
at least six (6) months. (Section 105(f) of the Tariff and Customs Code). Due to their limited duration of
stay abroad X and Y are not considered as “returning residents” but they are merely considered as
travelers or tourists who enjoy the benefit of conditionally free importation.
Note:
Credit must likewise be given if the candidate answered in the affirmative, considering that travelers or
tourists are given the same tax treatment as that of returning residents, treating their personal effects, not
in commercial quantities, as conditionally free importation. (BAR 2003)
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H. Classification of duties
1. Ordinary/regular duties
a. Ad valorem; methods of valuation
(1) Transaction value
1. State and explain the basis of dutiable value of an imported article subject to an ad valorem tax
under the Tariff and Customs Code.
SUGGESTED ANSWER:
The basis of dutiable value of an imported article subject to an ad valorem tax under the Tariff and
Customs Code is its transaction value. (Sec. 201 (A), Tariff and Customs Code, as amended by R.A. No.
9135). If such value could not be determined, then the following values are to be utilized in their
sequence: Transaction value of identical goods (Secs. 201 (B), Ibid; Sec. II. C.l, C.A.O. No. 4-2004);
Transaction value of similar goods (Sec. 201 (C), Ibid.; Sec. II, D. 1, C.A.O. No. 4-2004); Deductive .value
(Sec. II, E. 1, C.A.O. No. 4-2004); Computed value (Sec. n, F.l, C.A.O. No. 1-20040) and Fallback value (Sec.
201 (F), Ibid.)
ANOTHER SUGGESTED ANSWER:
The basis of dutiable value of an imported article subject to an ad valorem tax under the Tariff and
Customs Code is its transaction value which shall be the price actually paid or payable for the goods when
sold for export to the Philippines, adjusted by adding certain cost elements to the extent that they are
incurred by the buyer but are not included in the price actually paid or payable for the imported goods
(Sec. 201(A), Tariff and Customs Code, as amended by R.A. No. 9135) If such value could not be
determined, then the following values are to be utilized in their sequence: Transaction value of identical
goods (Sec. 201 (B) ibid; Sec. n, C. 1, C.A.O. No. 4-2004); Transaction value of similar goods (Sec. 201 (C),
Ibid,; Sec. n, D.l, C.A.O. No. 4-2004); Deductive value (Sec. 11, E.l, C.A.O. No. 4-2004); Computed value (Sec.
II, F.l, C.A.O. No. 1-20040) and Fallback value (Sec. 201 (F) ibid.) (BAR 2005)
(2) Transaction value of identical goods
(3) Transaction value of similar goods
(4) Deductive value
(5) Computed value
(6) Fallback value
b. Specific
2. Special duties
1. Explain briefly each of the special customs duties authorized under the Tariff and Customs Code.
ANSWER:
The following are the special duties imposed under the Tariff and Customs Code:
(a) Dumping Duty - This is a duty levied on imported goods where it appears that a specific kind or class
of foreign article is being imported into or sold or is likely to be sold in the Philippines at a price less
than its fair value:
(b) Countervailing Duty - This is a duty equal to the ascertained or estimated amount of the subsidy or
bounty or subvention granted by the foreign country on the production, manufacture, or exportation
into the Philippines of any article likely to injure an industry in the Philippines or retard or
considerable retard the establishment of such industry:
Page | 221

(c) Marking Duty - This is a duty on an ad valorem basis imposed for improperly marked articles. The law
requires that foreign Importations must be marked in any official language of the Philippines the name
of the country of origin of the article:
(d) Discriminatory or Retaliatory Duty - This is a duty imposed on imported goods whenever it is found as
a fact that the country of origin discriminates against the commerce of the Philippines in such a
manner as to place the commerce of the Philippines at a disadvantage compared with the commerce of
any foreign country. (BAR 1997)
2. Under the Tariff and Customs Code, what are
a) dumping duties
b) countervailing duties
c) marking duties
d) discriminatory duties?
ANSWER:
a) Dumping duties are special duties imposed by the Secretary of Finance upon recommendation of
the Tariff Commission when it is found that the price of the imported articles is deliberately or
continually fixed at less than the fair market value or cost of production, and the importation
would cause or likely cause an injury to local industries engaged in the manufacture or production
of the same or similar articles or prevent their establishment.
b) Countervailing duties are special duties imposed by the Secretary of Finance upon prior
investigation and report of the Tariff Commission to offset an excise or inland revenue tax upon
articles of the same class manufactured at home or subsidies to foreign producers or
manufacturers by their respective governments.
c) Marking duties are special duties equivalent to 5% ad valorem imposed on articles not properly
marked. These are collected by the Commissioner of Customs except when the improperly marked
articles are exported or destroyed under customs supervision and prior to final liquidation of the
corresponding entry. These duties are designed to prevent possible deception of the customers.
d) Discriminatory duties are special duties collected in an amount not exceeding 1Q0% ad valorem,
imposed by the President of the Philippines against goods of a foreign country which discriminates
against Philippine commerce or against goods coming from the Philippines and shipped to a
foreign country. (BAR 1995)
a. Dumping duties
1. Distinguish countervailing duty from dumping duty. (5%)
SUGGESTED ANSWER:
Countervailing duty is a duty imposed in an amount equal to the ascertained or estimated amount of the
subsidy or bounty or subvention granted by the foreign country on the production, manufacture or
exportation into the Philippines of any article likely to injure an industry in the Philippines or retard or
considerably retard the establishment of such industry. (Section 302, Tariff and Customs Code). On the
other hand. Dumping Duty is a duty levied on imported goods where it appears that a specific kind or class
of foreign article is being imported into or sold or is likely to be sold in the Philippines at a price , less than
its fair value. (Section 301, Tariff and Customs Code). (BAR 2005)
b. Countervailing duties
1. Distinguish countervailing duty from dumping duty. (5%)
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SUGGESTED ANSWER:
Countervailing duty is a duty imposed in an amount equal to the ascertained or estimated amount of the
subsidy or bounty or subvention granted by the foreign country on the production, manufacture or
exportation into the Philippines of any article likely to injure an industry in the Philippines or retard or
considerably retard the establishment of such industry. (Section 302, Tariff and Customs Code). On the
other hand. Dumping Duty is a duty levied on imported goods where it appears that a specific kind or class
of foreign article is being imported into or sold or is likely to be sold in the Philippines at a price , less than
its fair value. (Section 301, Tariff and Customs Code). (BAR 2005)
c. Marking duties
d. Retaliatory/discriminatory duties
e. Safeguard

I.

Remedies

1. Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules
that have been adopted on this score by –
The Tariff and Customs Code; and
SUGGESTED ANSWER:
The rules that have been adopted on prescription are as follows:
Tariff and Customs Code - It does not express any general statute of limitation; it provided, however, that
"when articles have entered and passed free of duty or final adjustment of duties made, with subsequent
delivery, such entry and passage free of duty or settlement of duties will, after the expiration of one (1)
year, from the date of the final payment of duties, in the absence of fraud or protest, be final and
conclusive upon all parties, unless the liquidation of import entry was merely tentative" (Sec 1603, TCC).
(BAR 1997)
1.

Government
a. Administrative/extrajudicial

1. The Tariff and Customs Code allows the Bureau of Customs to resort to the administrative remedy
of seizure, such as by enforcing the tax lien on the imported article, and to the judicial remedy of
filing an action in court. When does the Bureau of Customs normally avail itself –
(a) of the administrative, instead of the judicial remedy, or
(b) of the latter, instead of the former, remedy?
ANSWER:
(a) The Bureau of Customs normally avails itself of the administrative remedy of seizure, such as by
enforcing the tax lien on the imported articles. Instead of the judicial remedy when the goods to
which the tax lien attaches, regardless of ownership, is still in the custody or control of the
Government. In the case, however, of Importations which are prohibited or undeclared, the
remedy of seizure and forfeiture may still be exercised by the Bureau of Customs even if the goods
are no longer in its custody.
(b) On the other hand, when the goods are properly released and thus beyond the reach of tax lien, the
government can seek payment of the tax liability through judicial action since the tax liability of
the importer constitutes a personal debt to the government, therefore, enforceable by action. In
this case judicial remedy is normally availed of instead of the administrative remedy. (BAR 1997)
Page | 223

(1) Search, seizure, forfeiture, arrest
1. Jessie brought into the Philippines a foreign-made luxury car, and paid less than the actual taxes
and duties due. Due to the discrepancy, the Bureau of Customs instituted seizure proceedings and
issued a warrant of seizure and detention. The car, then parked inside a pay parking garage, was
seized and brought by government agents to a government impounding facility. The Collector of
Customs denied Jessie’s request for the withdrawal of the warrant.
Aggrieved, Jessie filed against the Collector a criminal complaint for usurpation of judicial
functions on the ground that only a judge may issue a warrant of search and seizure.
Resolve with reasons Jessie’s criminal complaint. (4%)
SUGGESTED ANSWER:
The criminal complaint is bereft of merit. The issuance of a warrant of seizure and detention by the
Collector of Customs for goods released contrary to law, as when there is underpayment of taxes and
duties, is his primary and exclusive jurisdiction and precludes the judge of regular courts from taking
cognizance of the subject matter. Accordingly, what was done by the Collector could not be a basis of a
prosecution for the usurpation of judicial functions (Commissioner v. Navarro, 77 SCRA 264[1977]).
Would your answer be the same if the luxury car was seized while parked inside the garage of
Jessie’s residence? Why or why not? (4%)
SUGGESTED ANSWER:
No. The luxury car being in a dwelling house, cannot be seized by officers of the Bureau of Customs
exercising police authority without a search warrant issued by a judge of a competent court (Section 2209,
TCC; Pads v. Pamaran, 56 SCRA 16 [1974]). (BAR 2009)
2. William Antonio imported into the Philippines a luxury car worth US$100,000. This car was,
however, declared only for US$20,000 and corresponding customs duties and taxes were paid
thereon. Subsequently, the Collector of Customs discovered the underdeclaration and he initiated
forfeiture proceedings of the imported car.
a) May the Collector of Customs declare the imported car forfeited in favor of the government?
Explain. (3%)
SUGGESTED ANSWER:
a) Yes. The Collector of Customs may declare forfeiture on imported goods which are undervalued or
entered and valued through fraudulent means or device to the prejudice of the Government. Since the
undervaluation is more than 30% of the actual value of the vehicle, it gives rise to a prima facie
evidence of fraud which subjects the vehicle to forfeiture. (Section 2530, TCC).
b) Are forfeiture proceedings of goods illegally imported criminal in nature? Explain. (3%)
SUGGESTED ANSWER:
b) No. An action for forfeiture is an action in rem, or an action directed against the imported goods
themselves independently of any criminal action, which is in the nature of an action in personam, that
may result as a consequence of a violation of an existing law. (C.F. Sharp and Co. Inc., v. Commissioner
of Customs, 22 SCRA 760 [1968]). (BAR 2008)
3. On January 1, 1996, armed with warrants of seizure and detention issued by the Bureau of
Customs, members of the customs enforcement and security services coordinated with the Quezon
City police to search the premises owned by a certain Mr. Ho along Kalayaan Avenue, Quezon City,
which allegedly contained untaxed vehicles and parts. While inside the premises, the member of
Page | 224

the customs enforcement and security services noted articles which were not included in the list
contained in the warrant. Hence, on January 15, 1996, an amended warrant and seizure was
issued.
On January 25, 1996, the customs personnel started hauling the articles pursuant to the amended
warrant. This prompted Mr. Ho to file a case for injunction and damages with a prayer for a
restraining order before the Regional Trial Court of Quezon City against the Bureau of Customs on
January 27, 1996. On the same date, the trial court issued a temporary restraining order.
A motion to dismiss was filed by the Bureau of Customs on the ground that the Regional Trial Court
has no jurisdiction over the subject matter of the complaint claiming that it was the Bureau of
Customs that has exclusive jurisdiction over it. Decide.
ANSWER:
The motion to dismiss should be granted. Seizure and forfeiture proceedings are within the exclusive
jurisdiction of the Collector of Customs to the exclusion of regular Courts. Regional Trial Courts are devoid
of competence to pass upon the validity or regularity of seizure and forfeiture proceedings conducted by
the Bureau of Customs and to enjoin or otherwise interfere with these proceedings (Republic vs. CFI of
Manila [Branch XXII], G.R. No. 43747, September 2,1992; Jao vs. CA, G.R No. 104604, October 6, 1995).
(BAR 1996)
4. In smuggling a shipment of garlic, the smugglers used an eight-wheeler truck which they hired for
the purpose of taking out the shipment from the customs zone. Danny, the truck owner, did not
have a certificate of public convenience to operate his trucking business. Danny did not know that
the shipment of garlic was illegally imported.
Can the Collector of Customs of the port seize and forfeit the truck as an instrument in the
smuggling?
ANSWER:
Yes, the Collector of Customs of the port can seize and forfeit the truck as an instrument in the smuggling
activity, since the same was used unlawfully in the importation of smuggled articles. The mere carrying of
such articles on board the truck (in commercial quantities) shall subject the truck to forfeiture, since it
was not being used as a duly authorized common carrier, which was chartered or leased as such. (Sec.
2530 (a], TCC)
Moreover, although forfeiture of the vehicle will not be effected if it is established that the owner thereof
had no knowledge of or participation in the unlawful act, there arises a prima facie presumption or
knowledge or participation if the owner is not in the business for which the conveyance is generally used.
Thus, not having a certificate of public convenience to operate a trucking business, he is legally deemed
not to have been engaged in the trucking business. (Sec. 2531, Tariff and Customs Code) (BAR 1994)
5. The Collector of Customs instituted seizure proceedings against a shipment of motor vehicles for
having been misdeclared as second-hand vehicles. State the procedure for the review of the
decision up to the Supreme Court of the Collector of Customs adverse to the importer.
ANSWER:
The procedure in seizure cases may be summarized as follows:
(a) The collector issues a warrant for the detention or forfeiture of the imported articles; (Sec. 2301.
Tariff and Customs Code)
(b) The Collector gives the importer a written notice of the seizure and fixes a hearing date to give the
importer an opportunity to be heard: (Sec. 2303, TCC)
Page | 225

(c) A formal hearing is conducted; (Sec. 2312. TCC)
(d) The Collector renders a declaration of forfeiture; (Sec. 2312, TCC)
(e) The importer aggrieved by the action of the Collector in any case of seizure may appeal to the
Commissioner for his review within fifteen (15) days from written notice of the Collector’s decision;
(Sec. 2313, TCC)
(f) The importer aggrieved by the action or ruling of the Commissioner in any case of seizure may appeal
to the Court of Tax Appeals; (Sec. 2402, TCC)
(g) The importer adversely affected by the decision of the Court of Tax Appeals may appeal to the Court of
Appeals within fifteen (15) days which may be extended for another fifteen (15) days or such period
as the Court of Tax Appeals may decide. (BAR 1994)
6. M/V Floria, a vessel of Philippine registry, was hired to transport beans from Singapore to India.
The vessel was allegedly hijacked at sea and found its way to Bataan. It is also alleged that said
beans are now with the List Co. and fake documents were used to show that the beans were
imported from Japan. The Collector of Customs seized the M/V Floria and its cargo. The owner of
M/V Floria filed a complaint in the Regional Trial Court to obtain possession of the vessel and the
beans. Does the RTC have jurisdiction over the case?
ANSWER:
The RTC has no jurisdiction. The Collector of Customs sitting in seizure and forfeiture proceedings has
exclusive jurisdiction to hear and determine all questions touching on the seizure and forfeiture of
dutiable goods. The RTC has no jurisdiction to pass upon the validity or regularity of the seizure and
forfeiture proceedings conducted by the Bureau of Customs. [Commissioner of Customs vs. Makasiar. 177
SCRA 27, 33-34 (1989) citing Pacis vs. Averin, 18 SCRA 9071966)]
Neither has RTC review powers over actions concerning seizure and forfeiture proceedings conducted by
the Collector of Customs which is reviewable by the Commissioner of Customs whose decision, in turn, is
reviewable by the Court of Tax Appeals, (ibid)
ALTERNATIVE ANSWERS:
a) No. The owner must have first appealed the decision of the Collector to the Commissioner of Customs,
and if the decision was adverse, then to the Court of Tax Appeals, consistent with the principle of
exhaustion of administrative remedies.
b) No. The question of seizure and forfeiture is for the Collector of Customs to determine in the first
instance and then the Commissioner of Customs. This is a field where the doctrine of primary
jurisdiction controls. The Collector of Customs when sitting in forfeiture proceedings, constitutes a
tribunal upon which the law confers jurisdiction to hear and determine all questions touching the
forfeiture and further disposition of the subject matter. The exclusive jurisdiction in seizure and
forfeiture cases vested in the Collector of Customs precludes the RTC from assuming cognizance over
such matter. The RTC is thus devoid of competence to act on the matter (Republic v. CF1 of Manila,
213 SCRA 222). (BAR 1993)

7. A disgruntled employee of Apache Corporation reported to the Commissioner of Customs that the
company is illegally importing electronic equipment by way of unlawful "shipside" activities
thereby evading payment of customs duties and taxes on the goods.
Accordingly, the Commissioner of Customs, upon the request of the Economic Intelligence and
Investigation Bureau (EIIB), issued warrants of seizure and detention and directed EIIB to seize
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the goods listed in the warrants.
After the seizure of the goods and considering the magnitude of the value of the goods, counsel for
Apache Corporation filed a petition with the Supreme Court for certiorari, prohibition and
mandamus to enjoin the Commissioner of Customs and his agents from continuing further with the
forfeiture proceedings and praying that the Commissioner return the confiscated articles on the
ground that the warrants were in violation of the Rules of Court and the Bill of Rights.
If you are a newly-appointed Solicitor in the office of the Solicitor General representing the
Commissioner of Customs, how would you defend the latter? Give the specific defenses.
ANSWER:
Appurtenant to its power under the Tariff and Customs Code to enforce the provisions of such law, the
Bureau of Customs may conduct searches and seizures even without the benefit of a warrant issued by a
judge upon probable cause. This is historically considered an exemption from the constitutional
guarantee against unreasonable searches and seizures.
Assuming that the enforcement of the warrant had been extended to the residence of the
President of Apache Corporation, is such enforcement valid? Explain.
ANSWER:
No. The Tariff and Customs Code authorizes custom officials and agents to search any building, except
dwelling houses.
Do you think the petition for certiorari, prohibition and mandamus filed by Apache Corporation
will prosper in the Supreme Court? Discuss.
ANSWER:
No. The choice of remedy assumes want of authority and Jurisdiction. Warrantless searches and
seizures are, however, authorized under TCC. Such searches and seizures are not considered
unreasonable within the meaning of the constitutional guarantee. (BAR 1992)
8. Sometime in 15 September 1990, a shipment of 150 packages of imported goods and personal
effects arrived and was unloaded at the Port of Manila. After the amount of P15,887.00 was paid
by the consignee as customs duties, internal revenue taxes, fees and other charges, the packages
were released from the Customs house. As the packages were being transported from the
Customs area to their destination, the truck carrying them was intercepted at T.M, Kalaw St.,
Ermita, Manila by agents of the Economic Intelligence & Investigation Bureau (EIIB). In a formal
communication. EIIB informed the Collector of Customs that the packages were released from
the customs zone without proper appraisal to the damage of the Government and requested for
the issuance of the necessary warrant of seizure. A seizure proceeding (S.I. No. 796) was then
instituted and the Collector of Customs issued a warrant of seizure and detention.
During the progress of the search and seizure, and while the goods were being removed by the
Customs agents from the bodegas where they were stored, the consignee filed a Petition (Civil Case
No. 234) with the Regional Trial Court of Manila asking that the Collector of Customs and all his
agents be restrained from further enforcing the aforesaid warrant and from proceeding with the
trial of S.I. 796, and that said warrant be declared null and void since the Collector no longer had
jurisdiction to issue the same considering that the customs duties and taxes had already been paid
and the goods had left the control and jurisdiction of the Bureau of Customs
Did the Collector of Customs have Jurisdiction to issue the warrant of seizure and detention?
ANSWER:
On the assumption that the goods* were released from Customs custody without proper appraisal as
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contended by EIIB, the Collector of Customs had Jurisdiction to issue the warrant of seizure and detention.
This remedy is generally available in importations tainted with irregularity (Sec. 2531, TCC: Viduya vs.
Berdiago. 73 SCRA 553).
Did the payment of the customs duties, taxes, etc. render illegal and improper the issuance of said
warrant?
ANSWER:
In seizure and forfeiture, the payment of customs duties, taxes, etc., does not necessarily render as
irregular and improper the issuance of a warrant of seizure and detention. What is legally consequential is
whether there was, in fact, an irregularity committed in the importation of the articles and their release
from customs.
Has the Regional Trial Court jurisdiction to hear and decide Civil Case No. 234?
ANSWER:
No. the RTC has no jurisdiction. In the case of seizures and forfeitures, an ordinary court may not take
cognizance of the case and. therefore, said courts would be bereft of jurisdiction to hear and decide the
same. The jurisdiction of the Collector of Customs in seizure and forfeiture proceedings is exclusive of all
other courts. The proper remedy would be to go through with the hearing of the case with the Collector of
Customs from whose decision an appeal may be made to the Commissioner of Customs and. thereafter, if
the taxpayer still feels aggrieved, to the Court of Tax Appeals (BAR 1991)
9. What is the rule on appeal from decisions of the Collector of Customs in protest and seizure cases?
When is the decision of the Collector of Customs appealable to the Court of Tax Appeals? Explain.
(5%)
SUGGESTED ANSWER:
Decisions of the Collector of Customs in protest and seizure cases are appealable to the Commissioner of
Customs within 15 days from receipt of notice of the written decision.
As a rule, decisions of the Collector of Customs are not appealable to the Court of Tax Appeals. If the
Collector of Customs, however, does not decide a protest for a long period of time, the inaction may be
considered as an adverse decision by the Collector of Customs and the aggrieved taxpayer may appeal to
the CTA even without the Collector’s and Commissioner’s actual decision (Commissioner of Customs v.
Planters Products, Inc. G.R. No. 82018, March 16, 1989).
b. Judicial
1. The Tariff and Customs Code allows the Bureau of Customs to resort to the administrative remedy
of seizure, such as by enforcing the tax lien on the imported article, and to the judicial remedy of
filing an action in court. When does the Bureau of Customs normally avail itself –
(c) of the administrative, instead of the judicial remedy, or
(d) of the latter, instead of the former, remedy?
ANSWER:
(c) The Bureau of Customs normally avails itself of the administrative remedy of seizure, such as by
enforcing the tax lien on the imported articles. Instead of the judicial remedy when the goods to
which the tax lien attaches, regardless of ownership, is still in the custody or control of the
Government. In the case, however, of Importations which are prohibited or undeclared, the
remedy of seizure and forfeiture may still be exercised by the Bureau of Customs even if the goods
are no longer in its custody.
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(d) On the other hand, when the goods are properly released and thus beyond the reach of tax lien, the
government can seek payment of the tax liability through judicial action since the tax liability of
the importer constitutes a personal debt to the government, therefore, enforceable by action. In
this case judicial remedy is normally availed of instead of the administrative remedy. (BAR 1997)
2.

(1) Rules on appeal including jurisdiction
Taxpayer

1. Compare the taxpayer’s remedies under the National Internal Revenue Code and the Tariff and
Customs Code.
ANSWER:
The taxpayer's remedies under the National Internal Revenue Code may be categorized into remedies
before payment and remedies after payment. The remedy before payment consists of administrative
remedy which is the filing of protest within 30 days from receipt of assessment, and judicial remedy which
is the appeal of the adverse decision of the Commissioner on the protest with the Court of Tax Appeals,
thereafter to the Court of Appeals and finally with the Supreme Court.
The remedy after payment is availed of by paying the assessed tax within 30 days from receipt of
assessment and the filing of a claim for refund or tax credit of these taxes on grounds that they are
erroneously paid within two years from date of payment. If there is a denial of the claim, appeal to the CTA
shall be made within thirty days from denial but within two years from date of payment. If the
Commissioner fails to act on the claim for refund or tax credit and the two- year period is about to expire,
the taxpayer should consider the continuous inaction of the Commissioner as a denial and elevate the case
to the CTA before the expiration of the two- year period.
Under the Tariff and Customs Code, taxpayer’s remedies arise only after payment of duties. The
administrative remedies consist of filing a claim for refund which may take the form of abatement or
drawback. The taxpayer can also file a protest within 15 days from payment if he disagrees with the ruling
or decision of the Collector of Customs regarding the legality or correctness of the assessment of customs
duties. If the decision of the Collector is adverse to the taxpayer, he can notify the Collector within 15 days
from receipt of said decision of his desire to have his case reviewed by the Commissioner. The decision of
the Collector on the taxpayer’s protest, if adverse to the Government, is automatically elevated to the
Commissioner for review; and if such decision is affirmed by the Commissioner, the same shall be
automatically elevated to and finally reviewed by the Secretary of Finance.
Resort to judicial relief can be had by the taxpayer by appealing the decision of the Commissioner or of the
Secretary of Finance (for cases subject to automatic review) within 30 days from the promulgation of the
adverse decision to the CTA. (BAR 1996)
2. Discuss briefly the remedies of an importer during the pendency of seizure proceedings.
ANSWER:
During the pendency of seizure proceedings the importer may secure the release of the imported property
for legitimate use by posting a bond in an amount to be fixed by the Collector, conditioned for the payment
of the appraised value of the article and/or any fine, expenses and costs which may be adjudged in the
case; provided, that articles the importation of which is prohibited by law shall not be released under
bond.
The importer may also offer to pay to the collector a fine imposed by him upon the property to secure its
release or in case of forfeiture, the importer shall offer to pay for the domestic market value of the seized
article, which offer subject to the approval of the Commissioner maybe accepted by the Collector in
settlement of the seizure case, except when there is fraud. Upon payment of the fine or domestic market
value, the property shall be forthwith released and all liabilities which may or might attach to the property
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by virtue of the offense which was the occasion of the seizure and all liability which might have been
incurred under any bond given by the importer in respect to such property shall thereupon be deemed to
be discharged. (BAR 1996)
a. Protest
1. The Collector of Customs issued an assessment for unpaid customs duties and taxes on the
importation of your client in the amount of P980.000.00. Where will you file your case to protect
your client’s right? Choose the correct courts/ agencies, observing their proper hierarchy. 5%
1.
2.
3.
4.
5.
6.
7.

Court of Tax Appeals
Collector of Customs
Commissioner of Customs
Regional Trial Court
Metropolitan Trial Court
Court of Appeals
Supreme Court

SUGGESTED ANSWER:
I will file a protest with the Collector of Customs (Sec. 230S, TCC). Should the Collector promulgate a
decision adverse to my client, I will give a written notice to the Collector, copy furnished the
Commissioner of Customs, of my client’s desire to have the matter reviewed by the Commissioner (Sec.
2313, TCC). If the Commissioner affirms the decision of the Collector I will file an appeal with the Court of
Tax Appeals within 30 days from receipt of the decision (1997 Rules of Civil Procedure, RA 9282). If the
Court of Tax Appeals issues a decision adverse to my client, I will file with the Supreme Court a verified
petition for review on certiorari pursuant to Rule 45 (RA 9282).
ANOTHER SUGGESTED ANSWER:
I will file my case as follows:
1. Protest with the Collector of Customs (Sec. 2308, TCC);
2. Review by the Commissioner of Customs (Sec. 2313, TCC);
3. Appeal to the Court of Tax Appeals (RJL 9282); and
4. Petition for Review on Certiorari with the Supreme Court (RJL 9282). (BAR 2006)
2. What is the basis of the automatic review procedure in the Bureau of Customs? Explain your
answer. (5%)
SUGGESTED ANSWER:
Automatic review is intended to protect the interest of the Government in the collection of taxes and
customs duties in seizure and protest cases. Without such automatic review, neither the Commissioner of
Customs nor the Secretary of Finance would know about the decision laid down by the Collector favoring
the taxpayer. The power to decide seizure and protest cases may be abused if no checks are instituted.
Automatic review is necessary because nobody is expected to appeal the decision of the Collector which is
favorable to the taxpayer and adverse to the Government. This is the reason why whenever the decision of
the Collector is adverse to the Government, the said decision is automatically elevated to the
Commissioner for review; and if such decision is affirmed by the Commissioner, the same shall be
automatically elevated to and be finally reviewed by the Secretary of Finance (Yaokasin v. Commissioner
of Customs, 180 SCRA 591 [1989]). (BAR 2002)
b. Abandonment
c. Abatement and refund

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V.

Judicial Remedies (R.A. No. 1125, as amended, and the Revised Rules of the Court of Tax Appeals)
1.

Jurisdiction of the Court of Tax Appeals
a. Exclusive appellate jurisdiction over civil tax cases

1. Mr. Abraham Eugenio, a pawnshop operator, after having been required by the Revenue District
Officer to pay value-added tax pursuant to a Revenue Memorandum Order (RMO) of the
Commissioner of Internal Revenue, filed with the Regional Trial Court an action questioning the
validity of the RMO.
If you were the judge, will you dismiss the case? 5%
SUGGESTED ANSWER:
Yes. A RMO is in reality a ruling or an opinion issued by the Commissioner in implementing the provisions
of the Tax Code dealing with the taxability of pawnshops. The power to review rulings issued by the
Commissioner is lodged with the Court of Tax Appeals (CTA) and not with the Regional Trial Court. A
ruling falls within the purview of “other matters arising under the Tax Code, ’’ appealable only to the CTA
(CIR v. Leal, 392 SCRA 9 [2002]). (BAR 2006)
2. In the investigation of the withholding tax returns of AZ Medina Security Agency (AZ Medina) for
the taxable years 1997 and 1998, a discrepancy between the taxes withheld from its employees
and the amounts actually remitted to the government was found. Accordingly, before the period of
prescription commenced to run, the BIR issued an assessment and a demand letter calling for the
immediate payment of the deficiency withholding taxes in the total amount of P250,000.00.
Counsel for AZ Medina protested the assessment for being null and void on the ground that no preassessment notice had been issued. However, the protest was denied. Counsel then filed a petition
for prohibition with the Court of Tax Appeals to restrain the collection of the tax.
Will the special civil action for prohibition brought before the CTA under Sec. 11 of RA No. 1125
prosper? Discuss your answer. (3%)
SUGGESTED ANSWER:
The special civil action for prohibition will not prosper, because the CTA has no jurisdiction to entertain
the same. The power to issue writ of injunction provided for under Section 11 of RA 1125 is only ancillary
to its appellate jurisdiction. The CTA is not vested with original jurisdiction to issue writs of prohibition or
injunction independently of and apart from an appealed case. The remedy is to appeal the decision of the
BIR. (Collector v. Yuseco, 3 SCRA 313 [1981]). (BAR 2002)
3. Does the Court of Appeals have the power to review compromise agreements forged by the
Commissioner of Internal Revenue and a taxpayer? Explain. (5%)
SUGGESTED ANSWER:
No, for either of two reasons (1) In instances in which the Commissioner of Internal Revenue is vested
with authority to compromise, such authority should be exercised in accordance with the Commissioner's
discretion, and courts have no power, as a general rule, to compel him to exercise such discretion one way
or another. (Koppel Phils., Inc. v. CIR, 87 Phil. 351 [1950ft, (2) If the Commissioner abuses his discretion
by not following the parameters set by law, the CTA, not the Court of Appeals, may correct such abuse if
the matter is appealed to it. In case of arbitrary or capricious exercise by the Commissioner of the power
to compromise, the compromise can be attacked and reversed though the judicial process. It must be
noted however, that a compromise is considered as other matters arising under the NIRC which vests the
CTA with jurisdiction, and since the decision of the CTA is appealable to the Supreme Court, the Court of
Appeals is devoid of any power of review a compromise settlement forged by the Commissioner (PNOCv.
Savellano, G.R. No. 109976, April 26, 2005; RA No. 9282 on jurisdiction of the CTA).
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4. The Collector of Customs of the Port of Cebu issued warrants of seizure and detention against the
importation of machineries and equipment by LLD Import and Export Co. (LLD) for alleged
nonpayment of tax and customs duties in violation of customs laws. LLD was notified of the seizure,
but, before it could be heard, the Collector of Customs issued a notice of sale of the articles. In
order to restrain the Collector from carrying out the order to sell, LLD filed with the Court of Tax
Appeals a petition for review with application for the issuance of a writ of prohibition. It also filed
with the CTA an appeal for refund of overpaid taxes on its other importations of raw materials
which has been pending with the Collector of Customs. The Bureau of Customs moved to dismiss
the case for lack of jurisdiction of the Court of Tax Appeals.
A. Does the Court of Tax Appeals have jurisdiction over the petition for review and writ of
prohibition? Explain (3%)
B. Will an appeal to the CTA for tax refund be possible? Explain (2%)
SUGGESTED ANSWER:
A. No, because there is no decision as yet by the Commissioner of Customs which can be appealed to the
CTA. Neither the remedy of prohibition would lie because the CTA has not acquired any appellate
jurisdiction over the seizure case. The writ of prohibition being merely ancillary to the appellate
jurisdiction, the CTA has no jurisdiction over it until it has acquired jurisdiction on the petition for
review. Since there is no appealable decision, the CTA has no jurisdiction over the petition for review
and writ of prohibition. (Commissioner of Customs v. Alikpala, 36 SCRA 208 [1970]).
B.

No, because the Commissioner of Customs has not yet rendered a decision on the claim for refund.
The jurisdiction of the Commissioner and the CTA are not concurrent in so far as claims for refund are
concerned. The only exception is when the Collector has not acted on the protested payment for a long
time, the continued inaction of the Collector or Commissioner should not be allowed to prejudice the
taxpayer. (Nestle Phils., Inc. v. Court of Appeals, GR No. 134114, July 6, 2001). (BAR 2002)

5. On June 16, 1997, the Bureau of Internal Revenue (BIR) issued against the Estate of Jose de la Cruz
a notice of deficiency estate tax assessment, inclusive of surcharge, interest and compromise
penalty. The Executor of the Estate of Jose de la Cruz (Executor) filed a timely protest against the
assessment and requested for waiver of the surcharge, interest and penalty. The protest was
denied by the Commissioner of Internal Revenue (Commissioner) with finality on September 13,
1997. Consequently, the Executor was made to pay the deficiency assessment on October 10, 1997.
The following day, the Executor filed a Petition with the Court of Tax Appeals (CTA) praying for the
refund of the surcharge, interest and compromise penalty. The CTA took cognizance of the case
and ordered the Commissioner to make a refund. The Commissioner filed a Petition for Review
with the Court of Appeals assailing the jurisdiction of the CTA and the Order to make refund to the
Estate on the ground that no claim for refund was filed with the BIR.
Is the stand of the Commissioner correct? Reason. (2%)
SUGGESTED ANSWER:
Yes. There was no claim for refund or credit that has been duly filed with the Commissioner of Internal
Revenue which is required before a suit or proceeding can be filed in any court (Sec. 229, NIRC of 1997).
The denial of the claim by the Commissioner is the one which will vest the Court of Tax Appeals
jurisdiction over the refund case should the taxpayer decide to appeal on time. (BAR 2000)
6. On the basis of a warrant of seizure and detention issued by the Collector of Customs for the
purpose of enforcing the Tariff and Customs Laws, assorted brands of cigarettes said to have been
illegally imported into the Philippines were seized from a store where they were openly offered for
sale. Dissatisfied with the decision rendered after hearing by the Collector of Customs on the
Page | 232

confiscation of the articles, the importer filed a petition for review with the Court of Tax Appeals.
The Collector moved to dismiss the petition for lack of jurisdiction. Rule on the motion. (2%)
SUGGESTED ANSWER:
Motion granted. The Court of Tax Appeals has Jurisdiction only over decisions of the Commissioner of
Customs in cases involving seizures, detention or release of property affected. (Sec. 7, RA. No. 1125). There
is no decision yet of the Commissioner which is subject to review by the Court of Tax Appeals. (BAR 2000)
ALTERNATIVE ANSWER:
Motion granted. The Court of Tax Appeals has no jurisdiction because there is no decision rendered by the
Commissioner of Customs on the seizure and forfeiture case. The taxpayer should have appealed the
decision rendered by the Collector within fifteen (15) days from receipt of the decision to the
Commissioner of Customs. The Commissioner is adverse decision would then be the subject of an appeal
to the Court of Tax Appeals.
Under the same facts, could the importer file an action in the Regional Trial Court for replevin on
the ground that the articles are being wrongfully detained by the Collector of Customs since the
importation was not illegal and therefore exempt from seizure? Explain. (3%)
SUGGESTED ANSWER:
No. The legislators intended to divest the Regional Trial Courts of the jurisdiction to replevin a property
which is a subject of seizure and forfeiture proceedings for violation of the Tariff and Customs Code
otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined
by the simple device of replevin. (De Ia Fuente v. De Veyra, et aL, 120 SCRA 455)
There should be no unnecessary hindrance on the government’s drive to prevent smuggling and other
frauds upon the Customs. Furthermore, the Regional Trial Court do not have jurisdiction in order to
render effective and efficient the collection of import and export duties due the State, which enables the
government to carry out the functions it has been instituted to perform. (Jiao, et aL, Court of Appeals, et aL,
and companion case, 249 SCRA 35, 43) (BAR 2000)
7. A Co., a Philippine corporation, received an income tax deficiency assessment from the BIR on May
5, 1995. On May 31, 1995, A Co. filed its protest with the BIR. On July 30, 1995. A Co. submitted to
the BIR all relevant supporting documents. The CIR did not formally rule on the protest but on
January 25. 1996, A Co. was served a summons and a copy of the complaint for collection of the tax
deficiency filed by the BIR with the Regional Trial Court (RTC). On February 20. 1996, A Co.
brought a Petition for Review before the CTA. The BIR contended that the Petition is premature
since there was no formal denial of the protest of A Co. and should therefore be dismissed.
Has the CTA jurisdiction over the case?
SUGGESTED ANSWER:
Yes, the CTA has jurisdiction over the case because this qualifies as an appeal from the Commissioner's
decision on disputed assessment. When the Commissioner decided to collect the tax assessed without first
deciding on the taxpayer's protest, the effect of the Commissioner is action of filing a judicial action for
collection is a decision of denial of the protest, in which event the taxpayer may file an appeal with the
CTA. (Republic v. Lim Tian Teng &. Sons, Inc., 16 SCRA 584; Dayrit v. Cruz, L-39910, Sept. 26, 1988) (BAR
1999)
8. A Co., a Philippine corporation, received an income tax deficiency assessment from the BIR on
November 25, 1996. On December 10, 1996, A Co. filed its protest with the BIR On May 20. 1997,
the BIR issued a warrant of distraint to enforce the assessment. ‘This warrant was served on A Co.
on May 25,1997. In a letter dated June 4,1997 and received by A Co. 5 days later, the CIR formally
denied A Co.’s protest stating that it constitutes his final decision on the matter. On July 6, 1997, A
Page | 233

Co. filed a Petition for Review with the CTA The BIR moved to dismiss the Petition on the ground
that the CTA has no jurisdiction over the case. Decide. (10%)
SUGGESTED ANSWER:
The CTA has jurisdiction over the case. The appealable decision is the one which categorically stated that
the Commissioner's action on the disputed assessment is final and, therefore, the reckoning of the 30-day
period to appeal was on June 9, 1999. The filing of the petition for review with the CTA was timely made.
The Supreme Court has ruled that the CIR must categorically state that his action on a disputed
assessment is final; other* wise, the period to appeal will not commence to run. That final action cannot be
implied from the mere issuance of a warrant of distraint and levy. (CIR v. Union Shipping Corporation, 185
SCRA 547). (BAR 1999)
9. A taxpayer received, on 15 January 1996, an assessment for an internal revenue tax deficiency. On
10 February 1996, the taxpayer forthwith filed a petition for review with the Court of Tax Appeals.
Could the Tax Court entertain the petition?
Under the above factual setting, the taxpayer, instead of questioning the assessment he received n
15 January 1996 paid, on 01 March 1996 the "deficiency tax" assessed. The taxpayer requested a
refund from the Commissioner by submitting a written claim on 01 March 1997. It was denied. The
taxpayer, on 15 March 1997, filed a petition for review with the Court of Appeals. Could the
petition still be entertained?
ANSWER:
No. Before taxpayer can avail of judicial remedy he must first exhaust administrative remedies by filing a
protest within 30 days from receipt of the assessment. It is the Commissioner's decision on the protest
that give the Tax Court jurisdiction over the case provided that the appeal is filed within 30 days from
receipt of the Commissioner’s decision. An assessment by the BIR is not the Commissioner's decision from
which a petition for review may be filed with the Court of Tax Appeals. Rather, it is the action taken by the
Commissioner in response to the taxpayer's protest on the assessment that would constitute the
appeallable decision (Section 7, RA 1125).
No, the petition for review cannot be entertained by the Court of Appeals, since decisions of the
Commissioner on cases involving claim for tax refunds are within the exclusive and primary jurisdiction of
the Court of Tax Appeals (Section 7, RA 1125). (BAR 1997)
10. Under Section 2523 of the Tariff and Customs Code, the duty of verifying the correct weight of a
cargo shipment is imposed upon the vessel’s master, owner or employee. If a discrepancy between
the actual gross weight and declared gross weight of manifested cargo exceeds 20% and “the
Collector shall be of the opinion that such discrepancy was due to the carelessness or
incompetency of the master or pilot in command, owner or employee of the vessel, a fine of not
more than 15% of the value of the article may be imposed upon the importing vessel.”
ABC Corporation’s vessel was found, after appropriate administrative proceedings, to have
violated the said provision far exceeding the 20% statutory limitation. The Collector of Customs
imposed a dine of P22.600.00 (representing 15% of the value of the discrepancy) which was
affirmed by the Commissioner of Customs.
On appeal by ABC Corporation, the Court of Tax Appeals found the fine of P22.600.00 harsh and
unreasonable for a first offense and reduced the same to P5.000.00.
The Commissioner of Customs questions the scope of authority of the Court of Tax Appeals in the
determination of the fine imposable under Section 2523 of the Tariff and Customs Code.
Whose judgment should prevail under the circumstances of the case? Explain fully.
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ANSWER:
The judgment of the Court of Tax Appeals should prevail.
The CTA has exclusive appellate jurisdiction over decisions of the Commissioner of Customs in cases
involving the imposition of fines, forfeitures or other penalties. (BAR 1992)
(1) Cases within the jurisdiction of the court en banc
(2) Cases within the jurisdiction of the court in divisions
b. Criminal cases
(1) Exclusive original jurisdiction
1. In criminal cases where the Court of Tax Appeals (CTA) has exclusive original jurisdiction , the
right to file a separate civil action for the recovery of taxes may be reserved. (1%)
SUGGESTED ANSWER:
FALSE. [Sec. 11, Rule 9, 2005 Rules of the Tax Appeals, as amended.]
2. The proceeding before the CTA in the exercise of its exclusive original jurisdiction are in the nature
of trial de novo. (1%)
SUGGESTED ANSWER:
TRUE. [CIR v.Manila Mining Corp. GR No.153204, Aug 31, 2005]
3. Judgments, resolutions or orders of the Regional Trial Court in the Exercise of its original
jurisdiction involving criminal offenses arising from violations of the NIRC are appealable to the
CTA, which shall hear the cases en banc. (1%)
SUGGESTED ANSWER:
FALSE. [Sec. 3(b)(2), Rule 4, 2005 Revised Rules of the Court of Tax Appeals.]
(2) Exclusive appellate jurisdiction in criminal cases
2.

Judicial procedures
a. Judicial action for collection of taxes

1. Which court acts on: tax collection cases filed by the BIR?
ANSWER:
Tax collection cases are filed by the BIR with regular courts. (BAR 1992)
(1) Internal revenue taxes
1. On March 15, 2000, the BIR issued a deficiency income tax assessment for the taxable year 1997
against the Valera Group of Companies (Valera) in the amount of P10 million. Counsel for Valera
protested the assessment and requested a reinvestigation of the case. During the investigation, it
was shown that Valera had been transferring its properties to other persons. As no additional
evidence to dispute the assessment had been presented, the BIR issued on June 16, 2000 warrants
of distraint and levy on the properties and ordered the filing of an action in the Regional Trial
Court for the collection of the tax. Counsel for Valera filed an injunctive suit in the Regional Trial
Court to compel the BIR to hold the collection of the tax in abeyance until the decision on the
protest was rendered.
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Can the BIR file the civil action for collection, pending decision on the administrative protest?
Explain. (3%)
SUGGESTED ANSWER:
Yes, because there is no prohibition for this procedure considering that the filing of a civil action for
collection during the pendency of an administrative protest constitutes the final decision of the
Commissioner on the protest (CIR v. Union Shipping Corp., 85 SCRA 548 [1990]).
As counsel for Valera, what action would you take in order to protect the interest of your client?
Explain your answer. (2%)
SUGGESTED ANSWER:
I will wait for the filing of the civil action for collection and consider the same as an appealable decision. I
will not file an injunctive suit because it is not an available remedy. I would then appeal the case to the
Court of Tax Appeals and move for the dismissal of the collection case with the RTC. Once the appeal to the
CTA Is filed on time, the CTA has exclusive jurisdiction over the case. Hence, the collection case in the RTC
should be dismissed (Yabes v. Flojo, 115 SCRA 278 [1982]). (BAR 2002)
2. Describe separately the procedures on the legal remedies under the Tax Code available to an
aggrieved taxpayer both at the administrative and judicial levels. (5%)
SUGGESTED ANSWER:
The legal remedies of an aggrieved taxpayer under the Tax Code, both at the administrative and judicial
levels, may be classified into those for assessment, collection and refund.
The procedures for the administrative remedies for assessment are as follows:
a. After receipt of the Pre-Assessment Notice, he must within fifteen (15) days from receipt explain
why no additional taxes should be assessed against him.
b. If the Commissioner of Internal Revenue Issues an assessment notice, the taxpayer must
administratively protest or dispute the assessment by filing a motion for reconsideration or
reinvestigation within thirty (30) days from receipt of the notice of assessment. (4th par., Sec. 228,
NIRC of 1997)
Within sixty (60) days from filing of the protest, the taxpayer shall submit all relevant supporting
documents.
The judicial remedies of an aggrieved taxpayer relative to an assessment notice are as follows:
a. Where the Commissioner of Internal Revenue has not acted on the taxpayer’s protest within a
period of one hundred eighty (180) days from submission of all relevant documents, then the
taxpayer has a period of thirty (30) days from the lapse of said 180 days within which to interpose
a petition for review with the Court of Tax Appeals.
b. Should the Commissioner deny the taxpayer's protest, then he has a period of thirty (30) days
from receipt of said denial within which to interpose a petition for review with the Court of Tax
Appeals.
In both cases the taxpayer must apply with the Court of Tax Appeals for the issuance of an injunctive writ
to enjoin the Bureau of Internal Revenue from collecting the disputed tax during the pendency of the
proceedings.
The adverse decision of the Court of Tax Appeals is appealable to the Court of Appeals by means of a
petition for certiorari within a period of fifteen (15) days from receipt of the adverse decision, extendible
for another period of fifteen (15) days for compelling reasons, but the extension is not to exceed a total of
thirty (30) days in all.
Page | 236

The adverse decision of the Court of Appeals is appealable to the Supreme Court by means of a petition for
review on certiorari within a period of fifteen (15) days from receipt of the adverse decision of the Court
of Appeals.
The employment by the Bureau of Internal Revenue of any of the administrative remedies for the
collection of the tax like distraint, levy, etc. may be administratively appealed by the taxpayer to the
Commissioner whose decision is appealable to the Court of Tax Appeals under other matter arising under
the provisions of the National Internal Revenue Code. The judicial appeal starts with the Court of Tax
Appeals, and continues in the same manner as shown above.
Should the Bureau of Internal Revenue decide to utilize Its judicial tax remedies for collecting the taxes by
means of an ordinary suit filed with the regular courts for the collection of a sum of money, the taxpayer
could oppose the same going up the ladder of judicial processes from the Municipal Trial Court (as the
case may be) to the Regional Trial Court, to the Court of Appeals, thence to the Supreme Court.
The remedies of an aggrieved taxpayer on a claim for refund is to appeal the adverse decision of the
Commissioner to the CTA in the same manner outlined above. (BAR 2000)
3. Compare the taxpayer’s remedies under the National Internal Revenue Code and the Tariff and
Customs Code.
ANSWER:
The taxpayer's remedies under the National Internal Revenue Code may be categorized into remedies
before payment and remedies after payment. The remedy before payment consists of administrative
remedy which is the filing of protest within 30 days from receipt of assessment, and judicial remedy which
is the appeal of the adverse decision of the Commissioner on the protest with the Court of Tax Appeals,
thereafter to the Court of Appeals and finally with the Supreme Court.
The remedy after payment is availed of by paying the assessed tax within 30 days from receipt of
assessment and the filing of a claim for refund or tax credit of these taxes on grounds that they are
erroneously paid within two years from date of payment. If there is a denial of the claim, appeal to the CTA
shall be made within thirty days from denial but within two years from date of payment. If the
Commissioner fails to act on the claim for refund or tax credit and the two- year period is about to expire,
the taxpayer should consider the continuous inaction of the Commissioner as a denial and elevate the case
to the CTA before the expiration of the two- year period.
Under the Tariff and Customs Code, taxpayer’s remedies arise only after payment of duties. The
administrative remedies consist of filing a claim for refund which may take the form of abatement or
drawback. The taxpayer can also file a protest within 15 days from payment if he disagrees with the ruling
or decision of the Collector of Customs regarding the legality or correctness of the assessment of customs
duties. If the decision of the Collector is adverse to the taxpayer, he can notify the Collector within 15 days
from receipt of said decision of his desire to have his case reviewed by the Commissioner. The decision of
the Collector on the taxpayer’s protest, if adverse to the Government, is automatically elevated to the
Commissioner for review; and if such decision is affirmed by the Commissioner, the same shall be
automatically elevated to and finally reviewed by the Secretary of Finance.
Resort to judicial relief can be had by the taxpayer by appealing the decision of the Commissioner or of the
Secretary of Finance (for cases subject to automatic review) within 30 days from the promulgation of the
adverse decision to the CTA. (BAR 1996)
(2) Local taxes
(i) Prescriptive period
Page | 237

1. On August 5, 1997, Adamson Co., Inc. (Adamson) filed a request for reconsideration of the
deficiency withholding tax assessment on July 10, 1997, covering the taxable year 1994. After
administrative hearings, the original assessment of P150,000.00 was reduced to P75,000.00 and a
modified assessment was thereafter issued on August 05, 1999. Despite repeated demands,
Adamson failed and refused to pay the modified assessment. Consequently, the BIR brought an
action for collection in the Regional Trial Court on September 15,2000. Adamson moved to dismiss
the action on the ground that the government’s right to collect the tax by judicial action has
prescribed.
Decide the case. (5%)
SUGGESTED ANSWER:
The right of the Government to collect by judicial action has not prescribed. The filing of the request for
reconsideration suspended the running of the prescriptive period and commenced to run again when a
decision on the protest was made on August 5,1999. It must be noted that in all cases covered by an
assessment, the period to collect shall be five (5) years from the date of the assessment but this period is
suspended by the filing of a request for reconsideration which was acted upon by the Commissioner of
internal Revenue (CIR v. Wyeth Suaco Laboratories, Inc., 202 SCRA 125 [1991]). (BAR 2002)
2. Taxes were generally imprescriptible; statutes, however, may provide otherwise. State the rules
that have been adopted on this score by –
The Local Government Code Answer;
SUGGESTED ANSWER:
The rules that have been adopted on prescription are as follows:
Local Government Code - Local taxes, fees, or charges shall be assessed within five (5) years from the date
they became due. In case of fraud or intent to evade the payment of taxes, fees or charges the same maybe
assessed within ten years from discovery of the fraud or intent to evade payment. They shall also be
collected either by administrative or judicial action within five (5) years from date of assessment (Sec.
194, LGC). (BAR 1997)
b. Civil cases
(1) Who may appeal, mode of appeal, effect of appeal
1. The Collector of Customs of the Port of Cebu issued warrants of seizure and detention against the
importation of machineries and equipment by LLD Import and Export Co. (LLD) for alleged
nonpayment of tax and customs duties in violation of customs laws. LLD was notified of the seizure,
but, before it could be heard, the Collector of Customs issued a notice of sale of the articles. In
order to restrain the Collector from carrying out the order to sell, LLD filed with the Court of Tax
Appeals a petition for review with application for the issuance of a writ of prohibition. It also filed
with the CTA an appeal for refund of overpaid taxes on its other importations of raw materials
which has been pending with the Collector of Customs. The Bureau of Customs moved to dismiss
the case for lack of jurisdiction of the Court of Tax Appeals.
A. Does the Court of Tax Appeals have jurisdiction over the petition for review and writ of
prohibition? Explain (3%)
B. Will an appeal to the CTA for tax refund be possible? Explain (2%)
SUGGESTED ANSWER:
A. No, because there is no decision as yet by the Commissioner of Customs which can be appealed to the
CTA. Neither the remedy of prohibition would lie because the CTA has not acquired any appellate
Page | 238

jurisdiction over the seizure case. The writ of prohibition being merely ancillary to the appellate
jurisdiction, the CTA has no jurisdiction over it until it has acquired jurisdiction on the petition for
review. Since there is no appealable decision, the CTA has no jurisdiction over the petition for review
and writ of prohibition. (Commissioner of Customs v. Alikpala, 36 SCRA 208 [1970]).
B.

No, because the Commissioner of Customs has not yet rendered a decision on the claim for refund.
The jurisdiction of the Commissioner and the CTA are not concurrent in so far as claims for refund are
concerned. The only exception is when the Collector has not acted on the protested payment for a long
time, the continued inaction of the Collector or Commissioner should not be allowed to prejudice the
taxpayer. (Nestle Phils., Inc. v. Court of Appeals, GR No. 134114, July 6, 2001). (BAR 2002)

2. On June 16, 1997, the Bureau of Internal Revenue (BIR) issued against the Estate of Jose de la Cruz
a notice of deficiency estate tax assessment, inclusive of surcharge, interest and compromise
penalty. The Executor of the Estate of Jose de la Cruz (Executor) filed a timely protest against the
assessment and requested for waiver of the surcharge, interest and penalty. The protest was
denied by the Commissioner of Internal Revenue (Commissioner) with finality on September 13,
1997. Consequently, the Executor was made to pay the deficiency assessment on October 10, 1997.
The following day, the Executor filed a Petition with the Court of Tax Appeals (CTA) praying for the
refund of the surcharge, interest and compromise penalty. The CTA took cognizance of the case
and ordered the Commissioner to make a refund. The Commissioner filed a Petition for Review
with the Court of Appeals assailing the jurisdiction of the CTA and the Order to make refund to the
Estate on the ground that no claim for refund was filed with the BIR.
Is the stand of the Commissioner correct? Reason. (2%)
SUGGESTED ANSWER:
Yes. There was no claim for refund or credit that has been duly filed with the Commissioner of Internal
Revenue which is required before a suit or proceeding can be filed in any court (Sec. 229, NIRC of 1997).
The denial of the claim by the Commissioner is the one which will vest the Court of Tax Appeals
jurisdiction over the refund case should the taxpayer decide to appeal on time. (BAR 2000)
3. On the basis of a warrant of seizure and detention issued by the Collector of Customs for the
purpose of enforcing the Tariff and Customs Laws, assorted brands of cigarettes said to have been
illegally imported into the Philippines were seized from a store where they were openly offered for
sale. Dissatisfied with the decision rendered after hearing by the Collector of Customs on the
confiscation of the articles, the importer filed a petition for review with the Court of Tax Appeals.
The Collector moved to dismiss the petition for lack of jurisdiction. Rule on the motion. (2%)
SUGGESTED ANSWER:
Motion granted. The Court of Tax Appeals has Jurisdiction only over decisions of the Commissioner of
Customs in cases involving seizures, detention or release of property affected. (Sec. 7, RA. No. 1125). There
is no decision yet of the Commissioner which is subject to review by the Court of Tax Appeals.
ALTERNATIVE ANSWER:
Motion granted. The Court of Tax Appeals has no jurisdiction because there is no decision rendered by the
Commissioner of Customs on the seizure and forfeiture case. The taxpayer should have appealed the
decision rendered by the Collector within fifteen (15) days from receipt of the decision to the
Commissioner of Customs. The Commissioner is adverse decision would then be the subject of an appeal
to the Court of Tax Appeals.
Under the same facts, could the importer file an action in the Regional Trial Court for replevin on
the ground that the articles are being wrongfully detained by the Collector of Customs since the
importation was not illegal and therefore exempt from seizure? Explain. (3%)
Page | 239

SUGGESTED ANSWER:
No. The legislators intended to divest the Regional Trial Courts of the jurisdiction to replevin a property
which is a subject of seizure and forfeiture proceedings for violation of the Tariff and Customs Code
otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined
by the simple device of replevin. (De Ia Fuente v. De Veyra, et aL, 120 SCRA 455)
There should be no unnecessary hindrance on the government’s drive to prevent smuggling and other
frauds upon the Customs. Furthermore, the Regional Trial Court do not have jurisdiction in order to
render effective and efficient the collection of import and export duties due the State, which enables the
government to carry out the functions it has been instituted to perform. (Jiao, et aL, Court of Appeals, et aL,
and companion case, 249 SCRA 35, 43) (BAR 2000)
(i) Suspension of collection of tax
1. What are the conditions that must be complied with before the Court of Tax Appeals may suspend
the collection of national internal revenue taxes? (3%)
SUGGESTED ANSWER:
The CTA may suspend the collection of internal revenue taxes if the following conditions are met:
a. the case is pending appeal with the CTA;
b. in the opinion of the Court the collection will jeopardize the interest of the Government and/ or the
taxpayer; and
c. the taxpayer is willing to deposit in Court the amount being collected or to file a surety bond for not
more than double the amount of the tax (Sec. 11, RA 1125, as amended by RA 9282).
2. RR disputed a deficiency tax assessment and upon receipt of an adverse decision by the
Commissioner of Internal Revenue, filed an appeal with the Court of Tax Appeals. While the appeal
is pending, the BIR served a warrant of levy on the real properties of RR to enforce the collection of
the disputed tax. Granting arguendo that the BIR can legally levy on the properties, what could RR
do to stop the process? Explain briefly. (5%)
SUGGESTED ANSWER:
RR should file a motion for injunction with the Court of Tax Appeals to stop the administrative collection
process. An appeal to the CTA shall not suspend the enforcement of the tax liability, unless a motion to that
effect shall have been presented in court and granted by it on the basis that such collection will jeopardize
the interest of the taxpayer or the Government (Pirovano v. CIR, 14 SCRA 832 [1965]).
The CTA is empowered to suspend the collection of internal revenue taxes and customs duties in cases
pending appeal only when: (1) in the opinion of the court the collection by the BIR will jeopardize the
interest of the Government and/or the taxpayer; and (2) the taxpayer is willing to deposit the amount
being collected or to file a surety bond for not more than double the amount of the tax to be fixed by the
court (Section 11, R.A. NO. 1125). (BAR 2004)
3. May the Court of Tax Appeals issue an injunction to enjoin the collection of taxes by the Bureau of
Internal Revenue? Explain.
ANSWER:
Yes. When a decision of the Commissioner on a tax protest is appealed to the CTA pursuant to Sec. 11 of
RA No. 1125 (law creating the CTA) in relation to Sec. 229 of the NIRC, such appeal does not suspend the
payment, levy, distraint and/or sale of any of the taxpayer’s property for the satisfaction of his tax liability.
However, when in the opinion of the CTA the collection of the tax may jeopardize the interest of the
Government and/or the taxpayer, the Court at any stage of the proceedings may suspend or restrain the
Page | 240

collection of the tax and require the taxpayer either to deposit the amount claimed or to file a surety bond
for not more than double the amount with the Court. (BAR 1996)
4. For failure of Oceanic Company, Inc. (OCEANIC), to pay deficiency taxes of P20 Million, the
Commissioner of Internal Revenue issued warrants of distraint on OCEANIC’s personal properties
and levied on its real properties. Meanwhile, the Department of Labor through the Labor Arbiter
rendered a decision ordering OCEANIC to pay unpaid wages and other benefits to its employees.
Four barges belonging to OCEANIC were levied upon by the sheriff and later sold at public auction.
The Commissioner of Internal Revenue filed a motion with the Labor Arbiter to annul the sale and
enjoin the sheriff from disposing the proceeds thereof. The employees of - OCEANIC opposed the
motion contending that Art. 110 of the Labor Code gives first preference to claims for unpaid
wages.
Resolve the motion. Explain.
ANSWER:
The motion filed by the Commissioner should be granted because the claim of the government for unpaid
taxes are generally preferred over the claims of laborers for unpaid wages. The provision of Article 110 of
the Labor Code, which gives laborers’ claims for preference applies only in case of bankruptcy or
liquidation of the employer’s business. In the instant case, Oceanic is not under bankruptcy or liquidation
at the time the warrants of distraint and levy were issued hence, the opposition of the employees is
unwarranted. (CIR vs. NLRC et at G.R No. 74965, November 9, 1994). (BAR 1995)
a) Injunction not available to restrain collection
1. May the courts enjoin the collection of revenue taxes? Explain your answer. (2%)
SUGGESTED ANSWER:
As a general rule, the courts have no authority to enjoin the collection of revenue taxes. (Sec. 218, NIRC).
However, the Court of Tax Appeals is empowered to enjoin the collection of taxes through administrative
remedies when collection could jeopardize the interest of the government or taxpayer. (Section 11, RA
1125) (BAR 2001)
(ii) Taking of evidence
(iii) Motion for reconsideration or new trial
1. On August 5, 1997, Adamson Co., Inc. (Adamson) filed a request for reconsideration of the
deficiency withholding tax assessment on July 10, 1997, covering the taxable year 1994. After
administrative hearings, the original assessment of P150,000.00 was reduced to P75,000.00 and a
modified assessment was thereafter issued on August 05, 1999. Despite repeated demands,
Adamson failed and refused to pay the modified assessment. Consequently, the BIR brought an
action for collection in the Regional Trial Court on September 15,2000. Adamson moved to dismiss
the action on the ground that the government’s right to collect the tax by judicial action has
prescribed.
Decide the case. (5%)
SUGGESTED ANSWER:
The right of the Government to collect by judicial action has not prescribed. The filing of the request for
reconsideration suspended the running of the prescriptive period and commenced to run again when a
decision on the protest was made on August 5,1999. It must be noted that in all cases covered by an
assessment, the period to collect shall be five (5) years from the date of the assessment but this period is
Page | 241

suspended by the filing of a request for reconsideration which was acted upon by the Commissioner of
internal Revenue (CIR v. Wyeth Suaco Laboratories, Inc., 202 SCRA 125 [1991]). (BAR 2002)
2. What are the requisites before a taxpayer's request for reinvestigation may be granted by the BIR?
Discuss briefly.
ANSWER:
A request for re-investigation refers to a plea for re- evaluation of an assessment on the basis of newlydiscovered evidence or additional evidence the taxpayer intends to present in the re-investigation.
ALTERNATIVE ANSWER:
He must file a written protest stating his grounds therefor so that his protest could be granted. (BAR
1992)
(2) Appeal to the CTA, en banc
(3) Petition for review on certiorari to the Supreme Court
c.Criminal cases
(1) Institution and prosecution of criminal actions
1. Based on the Affidavit of the Commissioner of Internal Revenue (CIR), an Information for failure to
file income tax return under Section 255 of the National Internal Revenue Code (NIRC) was filed by
the Department of Justice (DOJ) with the Manila Regional Trial Court (RTC) against XX, a Manila
resident.
XX moved to quash the Information on the ground that the RTC has no jurisdiction in view of the
absence of a formal deficiency tax assessment issued by the CIR.
Is a prior assessment necessary before an Information for violation of Section 255 of the NIRC
could be filed in court? Explain. (4%)
SUGGESTED ANSWER:
No. In the case of failure to file a return, a proceeding in court for the collection of the tax may be filed
without an assessment. (Sec. 222(a), NIRC). The tax can be collected by filing a criminal action with the
RTC because a criminal action is a mode of collecting the tax liability. (Sec. 205, NIRC). Besides, the
Commissioner is empowered to prepare a return on the basis of his own knowledge, and upon such
information as he can obtain from testimony or otherwise, which shall be prima facie correct and
sufficient for legal purposes (Sec. 6(B), NIRC; The issuance of a formal deficiency tax assessment, therefore
is not required.
2. Gerry was being prosecuted by the BIR for failure to pay - his income tax liability for Calendar Year
1999 despite several demands by the BIR in 2002. The Information was filed with the RTC only last
June 2006. Geriy filed a motion to quash the Information on the ground of prescription, the
Information having been filed beyond the 5-year reglementary period.
If you were the judge, will you dismiss the Information? Why? 5%
SUGGESTED ANSWER:
No. The trial court can exercise jurisdiction. Prescription of a criminal action begins to run from the day of
the commission of the violation of the law. The criminal violation was committed when Gerry willfully
refused to pay despite repeated demands in 2002. Since the information was filed in June 2006, the
criminal case was instituted within the five-year period required by law (Tupaz v. Ulep, 316 SCRA 118
[1999]; Sec. 281, NIRC). (BAR 2006)
Page | 242

3. Danilo, who is engaged in the trading business, entrusted to his accountant the preparation of his
income tax return and the payment of the tax due. The accountant filed a falsified tax return by
underdeclaring the sales and overstating the expense deductions by Danilo.
What is the liability, if any, of the accountant? Discuss.
SUGGESTED ANSWER:
The accountant may be held criminally liable for violation of the Tax Code when he falsified the tax return
by underdeclaring the sale and overstating the expense deductions. (Sec. 257, NIRC). If Danny's
accountant is a Certified Public Accountant, his certificate as CPA shall automatically be revoked or
cancelled upon conviction. (BAR 2005)
4. TY Corporation filed its final adjusted income tax return for 1993 on April 12,1994 showing a net
loss from operations. After investigation, the BIR issued a pre-assessment notice on March 30,
1996. A final notice and demand letter dated April 15, 1997 was issued, personally delivered to
and received by the company’s chief accountant. For willful refusal and failure of TY Corporation to
pay the tax, warrants of distraint and levy on its properties were issued and served upon it. On
January 10, 2002, a criminal charge for violation of the Tax Code was instituted in the Regional
Trial Court with the approval of the Commissioner.
The company moved to dismiss the criminal complaint on the ground that an act for violation of
any provision of the Tax Code prescribes after five (5) years and, in this case, the period
commenced to run on March 30,1996 when the pre-assessment was issued.
How will you resolve the motion? Explain your answer. (5%)
SUGGESTED ANSWER:
The motion to dismiss should not be granted. It is only when the assessment has become final and
unappealable that the 5-year period to file a criminal action commences to run (Tupaz v. Ulep, 316 SCRA
118 [1999]). The pre-assessment notice issued on March 30,1996 is not a final assessment which is
enforceable by the BIR. It is the issuance of the final notice and demand letter dated April 15,1997 and the
failure of the taxpayer to protest within 30 days from receipt thereof that made the assessment final and
unappealable. The earliest date that the assessment has become final is May 16,1997 and since the
criminal charge was instituted on January 10, 2002, the same was timely filed. (BAR 2002)
5. Mr. Chan, a manufacturer of garments, was investigated for failure to file tax returns and to pay
taxes for the taxable year 1997. Despite the subpoena duces tecum issued to him, he refused to
present and submit his books of accounts and allied records. Investigators, therefore, raided his
factory and seized several bundles of manufactured garments, supplies and unpaid imported
textile materials. After his apprehension and based on the testimony of a former employee,
deficiency income and business taxes were assessed against Mr. Chan on April 15, 2000. It was
then that he paid the taxes. Criminal action was nonetheless instituted against him in the Regional
Trial Court for violation of the Tax Code. Mr. Chan moved to dismiss the criminal case on the
ground that he had already paid the taxes assessed against him. He also demanded the return of
the garments and materials seized from his factory.
How will you resolve Mr. Chan’s motion? (5%)
SUGGESTED ANSWER:
The motion to dismiss should be denied. The satisfaction of the civil liability is not one of the grounds for
the extinction of criminal action (People v. Ildefonso Tierra, 12 SCRA 666 [1964]). Likewise, the payment
of the tax due after apprehension shall not constitute a valid defense in any prosecution for violation of
any provision of the Tax Code (Sec. 253[a], NIRC). However, the garments and materials seized from the
Page | 243

factory should be ordered returned because the payment of the tax had released them from any lien that
the Government has over them. (BAR 2002)
(i) Institution of civil action in criminal action
(2) Appeal and period to appeal
(i) Solicitor General as counsel for the people and government officials sued in their
official capacity
(3) Petition for review on certiorari to the Supreme Court
3.

Taxpayer’s suit impugning the validity of tax measures or acts of taxing authorities
a. Taxpayer’s suit

1. When may a taxpayer’s suit be allowed?
ANSWER:
A taxpayer's suit may only be allowed when an act complained of, which may include a legislative
enactment, directly involves the illegal disbursement of public funds derived from taxation (Pascual vs.
Secretary of Public Works, 110 Phil. 331). (BAR 1996)
2. The Municipality of Argao, Province of Cebu passed a tax ordinance requiring all professionals
practicing in the municipality to pay a tax equivalent to two (2%) percent of their gross income. A
certified true copy of the ordinance was sent to the Secretary of Finance for review on 1 March
1989 and was received by him on the same day. On 15 August 1989, even as the tax ordinance
remained unacted upon by the Secretary of Finance, the municipality started collecting the tax in
question. The members of the Philippine Bar in the municipality questioned the legality of the
ordinance and sought the suspension of the collection of the tax but the municipality argued that
since the Secretary has not taken any action on the ordinance for more than one hundred twenty
days after his receipt thereof, the legality of the ordinance can no longer be questioned and
insisted on the collection of the tax.
What remedies are available to the taxpayer to enable him to question the legality of that
ordinance?
ANSWER:
The taxpayer may pursue his remedies either administratively or Judicially. He may, as the case warrants,
file a formal protest with the Secretary of Finance or query with the Provincial Fiscal whose opinion is
appealable to the Secretary of Justice whose decision may be contested in the proper court. The other
remedy would be to file a special civil action for declaratory relief (if circumstances still warrant) or to
pay the tax and thereafter to file an action for refund within six (6) years after such payment.
ALTERNATIVE ANSWER:
On the basis of the facts of the problem. It would appear that the administrative remedy is no longer
available since there is already an attempt to enforce collection. The only remedy of the taxpayer is to pay
the tax and sue for its recovery in the ordinary court. (BAR 1991)
b. Distinguished from citizen’s suit
c. Requisites for challenging the constitutionality of a tax measure or act of taxing authority
(1) Concept of locus standi as applied in taxation
(2) Doctrine of transcendental importance
(3) Ripeness for judicial determination

--End-Page | 244

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