Bar Questions on Taxation 2014
2013 BAR
I.
In its final adjustment return for the 2010 taxable year, ABC Corp. had excess tax credits arising from its over-withholding of income payments. It opted to carry over the excess tax credits to the following year. Subsequently, ABC Corp. changed its mind and applied for a refund of the excess tax credits.
Will the claim for refund prosper? (6%)
II.
A group of philanthropists organized a non-stock, non-profit hospital for charitable purposes to provide medical services to the poor. The hospital also accepted paying patients although none of its income accrued to any private individual; all income were plowed back for the hospital's use and not more than 30% of its funds were used for administrative purposes.
Is the hospital subject to tax on its income? If it is, at what rate? (6%)
III.
ABC Corporation is registered as a holding company and has an office in the City of Makati. It has no actual business operations. It invested in another company and its earnings are limited to dividends from this investment, interests on its bank deposits, and foreign exchange gains from its foreign currency account. The City of Makati assessed ABC Corporation as a contractor or one that sells services for a fee. Is the City of Makati correct? (6%)
IV.
Atty. Gambino is a partner in a general professional partnership. The partnership computes its gross revenues, claims deductions allowed under the Tax Code, and distributes the net income to the partners, including Atty. Gambino, in accordance with its articles of partnership.
In filing his own income tax return, Atty. Gambino claimed deductions that the partnership did not claim, such as purchase of law books, entertainment expenses, car insurance and car depreciation. The BIR disallowed the deductions.
Was the BIR correct? (6%)
V.
Mr. Agustin, 75 years old and suffering from an incurable disease, decided to sell for valuable and sufficient consideration a house and lot to his son. He died one year later.
In the settlement of Mr. Agustin's estate, the BIR argued that the house and lot were transferred in contemplation of death and should therefore form part of the gross estate for estate tax purposes.
Is the BIR correct? (7%)
VI.
On October 15, 2005, ABC Corp. imported 1,000 kilos of steel ingots and paid customs duties and VAT to the Bureau of Customs on the importation. On February 17, 2009, the Bureau of Customs, citing provisions of the Tariff and Customs Code on post-audit, investigated and assessed ABC Corp. for deficiency customs duties and VAT.
Is the Bureau of Customs correct? (7%)
VII.
XYZ Law Offices, a law partnership in the Philippines and a VAT-registered taxpayer, received a query by e-mail from Gainsburg Corporation, a corporation organized under the laws of Delaware, but the e-mail came from California where Gainsburg has an office. Gainsburg has no office in the Philippines and does no business in the Philippines.
XYZ Law Offices rendered its opinion on the query and billed Gainsburg US$1,000 for the opinion. Gainsburg remitted its payment through Citibank which converted the remitted US$1 ,000 to pesos and deposited the converted amount in the XYZ Law Offices account.
What are the tax implications of the payment to XYZ Law Offices in terms of VAT and income taxes? (7%)
VIII.
Mr. Amado leased a piece of land owned by the Municipality of Pinagsabitan and built a warehouse on the property for his business operations. The Municipal Assessor assessed Mr. Amado for real property taxes on the land and the warehouse. Mr. Amado objected to the assessment, contending that he should not be asked to pay realty taxes on the land since it is municipal property.
Was the assessment proper? (5%)
IX.
In the settlement of the estate of Mr. Barbera who died intestate, his wife renounced her inheritance and her share of the conjugal property in favor of their children. The BIR determined that there was a taxable gift and thus assessed Mrs. Barbera as a donor.
Was the BIR correct? (7%)
X.
In 2010, pursuant to a Letter of Authority (LA) issued by the Regional Director, Mr. Abcede was assessed deficiency income taxes by the BIR for the year 2009. He paid the deficiency. In 2011, Mr. Abcede received another LA for the same year 2009, this time from the National Investigation Division, on the ground that Mr. Abcede's 2009 return was fraudulent.
Mr. Abcede contested the LA on the ground that he can only be investigated once in a taxable year. Decide. (7%)
XI.
In 2000, Mr. Belen bought a residential house and lot for P1,000,000. He used the property as his and his family's principal residence. It is now year 2013 and he is thinking of selling the property to buy a new one. He seeks your advice on how much income tax he would pay if he sells the property. The total zonal value of the property is P5,000,000 and the fair market value per the tax declaration is P2,500,000. He intends to sell it forP6,000,000.
What material considerations will you take into account in computing the income tax? Please explain the legal relevance of each of these considerations. (7%)
XII.
You are the retained tax counsel of ABC Corp. Your client informed you that they have been directly approached with a proposal by a BIR insider (i.e., a middle rank BIR official) on the tax matter they have referred to you for handling. The BIR insider's proposal is to settle the matter by significantly reducing the assessment, but he will get 50% of the savings arising from the reduced assessment.
What tax, criminal and ethical considerations will you take into account in giving your advice? Explain the relevance of each of these considerations. (9%)
MULTIPLE CHOICE QUESTIONS
I. ABC Corp. was dissolved and liquidating dividends were declared and paid to the stockholders.
What tax consequence follows? (1%)
(A) ABC Corp. should deduct a final tax of 10% from the dividends.
(B) The stockholders should declare their gain from their investment and pay income tax at the ordinary rates.
(C) The dividends are exempt from tax.
(D) ABC Corp. should withhold a 10% creditable tax.
II. MGC Corp. secured an income tax holiday for 5 years as a pioneer industry. On the fourth year of the tax holiday, MGC Corp. declared and paid cash dividends to its stockholders, all of whom are individuals.
Are the dividends taxable? (1%)
(A) The dividends are taxable; the tax exemption of MGC Corp. does not extend to its stockholders.
(B) The dividends are tax exempt because of MGC Corp.'s income tax holiday.
(C) The dividends are taxable if they exceed 50% of MGC Corp.'s retained earnings.
(D) The dividends are exempt if paid before the end of MGC Corp.'s fiscal year.
III. Mr. Alas sells shoes in Makati through a retail store. He pays the VAT on his gross sales to the BIR and the municipal license tax based on the same gross sales to the City of Makati. He comes to you for advice because he thinks he is being subjected to double taxation.
What advice will you give him? (1%)
(A) Yes, there is double taxation and it is oppressive.
(B) The City of Makati does not have this power.
(C) Yes, there is double taxation and this is illegal m the Philippines.
(D) Double taxation is allowed where one tax is imposed by the national government and the other by the local government.
IV. Congress passed a sin tax law that increased the tax rates on cigarettes by 1,000%. The law was thought to be sufficient to drive many cigarette companies out of business, and was questioned in court by a cigarette company that would go out of business because it would not be able to pay the increased tax.
The cigarette company is __________ (1%)
(A) wrong because taxes are the lifeblood of the government
(B) wrong because the law recognizes that the power to tax is the power to destroy
(C) correct because no government can deprive a person of his livelihood
(D) correct because Congress, in this case, exceeded its power to tax
V. Mr. Alvarez is in the retail business. He received a deficiency tax assessment from the BIR containing only the computation of the deficiency tax and the penalties, without any explanation of the factual and legal bases for the assessment.
Is the assessment valid? (1%)
(A) The assessment is valid; all that Mr. Alvarez has to know is the amount of the tax.
(B) The assessment is invalid; the law requires a statement of the facts and the law upon which the assessment is based.
(C) The assessment is valid but Mr. Alvarez can still contest it.
(D) The assessment is invalid because Mr. Alvarez has no way to determine if the computation is erroneous.
VI. In 2010, Mr. Platon sent his sister Helen $1 ,000 via a telegraphic transfer through the Bank of PI. The bank's remittance clerk made a mistake and credited Helen with $1,000,000 which she promptly withdrew. The bank demanded the return of the mistakenly credited excess, but Helen refused. The BIR entered the picture and investigated Helen.
Would the BIR be correct if it determines that Helen earned taxable income under these facts? (1%)
(A) No, she had no income because she had no right to the mistakenly credited funds.
(B) Yes, income is income regardless of the source.
(C) No, it was not her fault that the funds in excess of $1,000 were credited to her.
(D) No, the funds in excess of$1,000 were in effect donated to her.
VII. The municipality of San Isidro passed an ordinance imposing a tax on installation managers. At that time, there was only one installation manager in the municipality; thus, only he would be liable for the tax.
Is the law constitutional? (1%)
(A) It is unconstitutional because it clearly discriminates against this person.
(B) It is unconstitutional for lack of legal basis.
(C) It is constitutional as it applies to all persons in that class.
(D) It is constitutional because the power to tax is the power to destroy.
VIII. XYZ Corporation manufactures glass panels and is almost at the point of insolvency. It has no more cash and all it has are unsold glass panels. It received an assessment from the BIR for deficiency income taxes. It wants to pay but due to lack of cash, it seeks permission to pay in kind with glass panels.
Should the BIR grant the requested permission? (1%)
(A) It should grant permission to make payment convenient to taxpayers.
(B) It should not grant permission because a tax is generally a pecuniary burden.
(C) It should grant permission; otherwise, XYZ Corporation would not be able to pay.
(D) It should not grant permission because the government does not have the storage facilities for glass panels.
IX. Prior to the VAT law, sales of cars were subject to a sales tax but the tax applied only to the original or the first sale; the second and subsequent sales were not subject to tax.
Deltoid Motors, Inc. (Deltoid) hit on the idea of setting up a wholly-owned subsidiary, Gonmad Motors, Inc. (Gonmad), and of selling its assembled cars to Gonmad at a low price so it would pay a lower tax on the first sale. Gonmad would then sell the cars to the public at a higher price without paying any sales tax on this subsequent sale.
Characterize the arrangement. (1%)
A. The plan is a legitimate exercise of tax planning and merely takes advantage of a loophole in the law.
B. The plan is legal because the government collects taxes anyway.
C. The plan is improper; the veil of corporate fiction can be pierced so that the second sale will be considered the taxable sale.
D. The government must respect Gonmad's separate juridical personality and Deltoid's taxable sale to it.
X. PRT Corp. purchased a residential house and lot with a swimming pool in an upscale subdivision and required the company president to stay there without paying rent; it reasoned out that the company president must maintain a certain image and be able to entertain guests at the house to promote the company's business. The company president declared that because they are childless, he and his wife could very well live in a smaller house.
Was there a taxable fringe benefit? (1%)
(A) There was no taxable fringe benefit since it was for the convenience of the employer and was necessary for its business.
(B) There was a taxable fringe benefit since the stay at the house was for free.
(C) There was a taxable fringe benefit because the house was very luxurious.
(D) There was no taxable fringe benefit because the company president was only required to stay there and did not demand free housing.
XI. Taxpayer A was required by the BIR to sign and submit a waiver of the statute of limitations on the assessment period, to give the BIR more time to complete its investigation. The BIR accepted the waiver but failed to indicate the date of its acceptance.
What is the legal status of the waiver? (1%)
(A) The waiver is valid because the date of acceptance is immaterial and unimportant.
(B) The waiver is invalid; the taxpayer cannot be required to waive the statute of limitations.
(C) The waiver is invalid; the date of acceptance is crucial in counting the start of the period of suspension of the prescriptive period.
(D) The waiver is valid, having been accepted by the BIR.
XII. Taxpayer Andy received on January 3, 2010 a preliminary assessment notice (PAN) from the BIR, stating that he had fifteen (15) days from its receipt to comment or to file a protest. Eight (8) days later (or on January11, 2010), before he could comment or file a protest, Andy received the final assessment notice (FAN).
Decide on the validity of the FAN. (1%)
(A) The FAN is invalid; Andy was not given the chance to respond to the PAN, in violation of his due process rights.
(B) The FAN is invalid for being premature.
(C) The FAN is valid since it was issued before the right to assess prescribed.
(D) The FAN is valid. There is no legal requirement that the FAN should await the protest to the PAN because protest to the PAN is not mandatory.
XIII. MSI Corp. imports orange and lemon concentrates as raw materials for the fruit drinks it sells locally. The Bureau of Customs (BOC) imposed a 1% duty rate on the concentrates. Subsequently, the BOC changed its position and held that the concentrates should be taxed at 7% duty rate. MSI disagreed with the ruling and questioned it in the CTA which upheld MSI's position. The Commissioner of Customs appealed to the CTA en bane without filing a motion for reconsideration.
Resolve the appeal. (1%)
(A) The appeal should be dismissed because a motion for reconsideration is mandatory.
(B) The appeal should be dismissed for having been filed out of time.
(C) The appeal should be given due course since a motion for reconsideration is a useless exercise.
(D) The appeal should be upheld to be fair to the government which needs taxes.
XIV. The spouses Jun and Elvira Sandoval purchased a piece of land for P5,000,000 and included their two (2) minor children as co-purchasers in the Deed of Absolute Sale. The Commissioner of Internal Revenue (CIR) ruled that there was an implied donation and assessed donors' taxes against the spouses.
Rule on the CIR's action. (1%)
(A) The CIR is wrong; a donation must be express.
(B) The CIR is wrong; financial capacity is not a requirement for a valid sale.
(C) The CIR is correct; the amount involved is huge and ultimately ends up with the children.
(D) The CIR is correct; there was animus donandi since the children had no financial capacity to be co-purchasers.
XV. Pheleco is a power generation and distribution company operating mainly from the City of Taguig. It owns electric poles which it also rents out to other companies that use poles such as telephone and cable companies. Taguig passed an ordinance imposing a fee equivalent to 1% of the annual rental for these poles. Pheleco questioned 'the legality of the ordinance on the ground that it imposes an income tax which local government units (LGUs) are prohibited from imposing.
Rule on the validity of the ordinance. (1%)
(A) The ordinance is void; the fee is based on rental income and is therefore a tax on income.
(B) The ordinance is valid as a legitimate exercise of police power to regulate electric poles.
(C) The ordinance is void; 1% of annual rental is excessive and oppressive.
(D) The ordinance is valid; an LGU may impose a tax on income.
XVI. Aleta sued Boboy for breach of promise to marry. Boboy lost the case and duly paid the court's award that included, among others, Pl00,000 as moral damages for the mental anguish Aleta suffered.
Did Aleta earn a taxable income? (1%)
(A) She had a taxable income of P100,000 since income is income from whatever source.
(B) She had no taxable income because it was a donation.
(C) She had taxable income since she made a profit.
(D) She had no taxable income since moral damages are compensatory.
XVII. Mr. Mayuga donated his residential house and lot to his son and duly paid the donor's tax. In the Deed of Donation, Mr. Mayuga expressly reserved for himself the usufruct over the property for as long as he lived.
Describe the donated property from the taxation perspective. (1%)
(A) The property will form part of Mr. Mayuga's gross estate when he dies.
(B) The property will not fom1 part of Mr. Mayuga's gross estate when he dies because he paid the donor's tax.
(C) The property will form part of Mr. Mayuga's gross estate because he died soon after the donation.
(D) The property will not form part of Mr. Mayuga's gross estate because it is no longer his.
XVIII. Mr. Z made an importation which he declared at the Bureau of Customs (BOC) as "Used Truck Replacement Parts". Upon investigation, the container vans contained 15 units of Porsche and Ferrari cars.
Characterize Mr. Z's action. (1%)
(A) Mr. Z committed smuggling.
(B) Mr. Z did not commit smuggling because he submitted his shipment to BOC examination.
(C) Mr. Z only made a misdeclaration, but did not commit smuggling.
(D) Mr. Z did not commit smuggling because the shipment has not left the customs area.
XIX. Mr. A was preparing his income tax return and had some doubt on whether a commission he earned should be declared for the current year or for the succeeding year. He sought the opinion of his lawyer who advised him to report the commission in the succeeding year. He heeded his lawyer's advice and reported the commission in the succeeding year. The lawyer's advice turned out to be wrong; in Mr. A's petition against the BIR assessment, the court ruled against Mr. A.
Is Mr. A guilty of fraud? (1%)
(A) Mr. A is not guilty of fraud as he simply followed the advice of his lawyer.
(B) Mr. A is guilty of fraud; he deliberately did not report the commission in the current year when he should have done so.
(C) Mr. A's lawyer should pay the tax for giving the wrong advice.
(D) Mr. A is guilty for failing to consult his accountant.
XX. The BIR, through the Commissioner, instituted a system requiring taxpayers to submit to the BIR a summary list of their sales and purchases during the year, indicating the name of the seller or the buyer and the amount. Based on these lists, the BIR discovered that in 2004 ABC Corp. purchased from XYZ Corp. goods worthP5,000,000. XYZ Corp. did not declare these for income tax purposes as its reported gross sales for 2004was only Pl,000,000.
Which of the following defenses may XYZ Corp. interpose in an assessment against it by the BIR? (1%)
(A) The BIR has no authority to obtain third party information to assess taxpayers.
(B) The third party information is inadmissible as hearsay evidence.
(C) The system of requiring taxpayers to submit third party information is illegal for violating the right to privacy.
(D) None of the above.
NOTHING FOLLOWS
2014 BAR
I.
On March 27, 2012, the Bureau of Internal Revenue (BIR) issued a notice of assessment against Blue Water Industries Inc. (BWI), a domestic corporation, informing the latter of its alleged deficiency corporate income tax for the year 2009. On April 20, 2012, BWI filed a letter protest before the BIR contesting said assessment and demanding that the same be cancelled or set aside.
However, on May 19, 2013, that is, after more than a year from the filing of the letter protest, the BIR informed BWI that the latter’s letter protest was denied on the ground that the assessment had already become final, executory and demandable. The BIR reasoned that its failure to decide the case within 180 days from filing of the letter protest should have prompted BWI to seek recourse before the Court of Tax Appeals (CTA) by filing a petition for review within thirty (30) days after the expiration of the 180-day period as mandated by the provisions of the last paragraph of Section 228 of the National Internal Revenue Code (NIRC). Accordingly, BWI’s failure to file a petition for review before the CTA rendered the assessment final, executory and demandable. Is the contention of the BIR correct? Explain. (5%)
II.
Mr. De Sarapen is a candidate in the upcoming Senatorial elections. Mr. De Almacen, believing in the sincerity and ability of Mr. De Sarapen to introduce much needed reforms in the country, contributed P500,000.00 in cash to the campaign chest of Mr. De Sarapen. In addition, Mr. De Almacen purchased tarpaulins, t-shirts, umbrellas, caps and other campaign materials that he also donated to Mr. De Sarapen for use in his campaign. Is the contribution of cash and campaign materials subject to donor’s tax? (4%)
III.
Dr. Taimtim is an alumnus of the College of Medicine of Universal University (UU), a privately-owned center for learning which grants yearly dividends to its stockholders.
UU has a famous chapel located within the campus where the old folks used to say that anyone who wanted to pass the medical board examinations should offer a dozen roses on all the Sundays of October. This was what Dr. Taimtim did when he was still reviewing for the board examinations. In his case, the folk saying proved to be true because he is now a successful cardiologist. Wanting to give back to the chapel and help defray the costs of its maintenance, Dr. Taimtim donated P50,000.00 to the caretakers of the chapel which was evidenced by an acknowledgment receipt.
In computing his net taxable income, can Dr.Taimtim use his donation to the chapel as an allowable deduction from his gross income under the National Internal Revenue Code (NIRC)? (4%)
IV.
Gangwam Corporation (GC) filed its quarterly tax returns for the calendar year 2012 as follows:
First quarter - April 25, 2012
Second quarter - July 23, 2012
Third quarter - October 25, 2012
Fourth quarter - January 27, 2013
On December 22, 2013, GC filed with the Bureau of Internal Revenue (BIR) an administrative claim for refund of its unutilized input Value-Added Tax (VAT) for the calendar year 2012. After several months of inaction by the BIR on its claim for refund, GC decided to elevate its claim directly to the Court of Tax Appeals (CTA) on April 22, 2014.
In due time, the CTA denied the tax refund relative to the input VAT of GC for the first quarter of 2012, reasoning that the claim was filed beyond the two-year period prescribed under Section 112(A) of the National Internal Revenue Code (NIRC).
(A) Is the CTA correct? (3%)
(B) Assuming that GC filed its claim before the CTA on February 22, 2014, would your answer be the same? (3%)
V.
The City of Liwliwa assessed local business taxes against Talin Company. Claiming that there is double taxation, Talin Company filed a Complaint for Refund or Recovery of Illegally and/or Erroneously-collected Local Business Tax; Prohibition with Prayer to Issue Temporary Restraining Order and Writ of Preliminary Injunction with the Regional Trial Court (RTC). The RTC denied the application for a Writ of Preliminary Injunction. Since its motion for reconsideration was denied, Talin Company filed a special civil action for certiorari with the Court of Appeals (CA). The government lawyer representing the City of Liwliwa prayed for the dismissal of the petition on the ground that the same should have been filed with the Court of Tax Appeals (CTA). Talin Company, through its lawyer, Atty. Frank, countered that the CTA cannot entertain a petition for certiorari since it is not one of its powers and authorities under existing laws and rules.
Decide. (5%)
VI.
Choose the correct answer. Smuggling - (1%)
(A) does not extend to the entry of imported or exported articles by means of any false or fraudulent invoice, statement or practices; the entry of goods at less than the true weight or measure; or the filing of any false or fraudulent entry for the payment of drawback or refund of duties.
(B) is limited to the import of contraband or highly dutiable cargo beyond the reach of customs authorities.
(C) is committed by any person who shall fraudulently import or bring into the Philippines, or assist in so doing, any article, contrary to law, or shall receive, conceal, buy, sell or any manner facilitate the transportation, concealment or sale of such article after importation, knowing the same to have been imported contrary to law.
VII.
In accordance with the Local Government Code (LGC), the Sangguniang Panglungsod (SP) of Baguio City enacted Tax Ordinance No. 19, Series of 2014, imposing a P50.00 tax on all the tourists and travellers going to Baguio City. In imposing the local tax, the SP reasoned that the tax collected will be used to maintain the cleanliness of Baguio City and for the beautification of its tourist attractions. (D) is punishable by administrative penalty only.
Claiming the tax to be unjust, Baguio Travellers Association (BTA), an association of travel agencies in Baguio City, filed a petition for declaratory relief before the Regional Trial Court (RTC) because BTA was apprehensive that tourists might cancel their bookings with BTA’s member agencies. BTA also prayed for the issuance of a Temporary Restraining Order (TRO) to enjoin Baguio City from enforcing the local tax on their customers and on all tourists going to Baguio City.
The RTC issued a TRO enjoining Baguio City from imposing the local tax. Aggrieved, Baguio City filed a petition for certiorari before the Supreme Court (SC) seeking to set aside the TRO issued by the RTC on the ground that collection of taxes cannot be enjoined. Will the petition prosper? (5%)
VIII.
Masarap Kumain, Inc. (MKI) is a Value-Added Tax (VAT)-registered company which has been engaged in the catering business for the past 10 years. It has invested a substantial portion of its capital on flat wares, table linens, plates, chairs, catering equipment, and delivery vans. MKI sold its first delivery van, already 10 years old and idle, to Magpapala Gravel and Sand Corp. (MGSC), a corporation engaged in the business of buying and selling gravel and sand. The selling price of the delivery van was way below its acquisition cost. Is the sale of the delivery van by MKI to MGSC subject to VAT? (4%)
IX.
Mr. Gipit borrowed from Mr. Maunawain P100,000.00, payable in five (5) equal monthly installments. Before the first installment became due, Mr. Gipit rendered general cleaning services in the entire office building of Mr. Maunawain, and as compensation therefor, Mr. Maunawain cancelled the indebtedness of Mr. Gipit up to the amount of P75,000.00. Mr. Gipit claims that the cancellation of his indebtedness cannot be considered as gain on his part which must be subject to income tax, because according to him, he did not actually receive payment from Mr. Maunawain for the general cleaning services. Is Mr. Gipit correct? Explain. (4%)
X.
Which of the following is an exclusion from gross income? (1%)
(A) Salaries and wages
(B) Cash dividends
(C) Liquidating dividends after dissolution of a corporation
(D) De minimis benefits
(E) Embezzled money
XI.
Triple Star, a domestic corporation, entered into a Management Service Contract with Single Star, a non-resident foreign corporation with no property in the Philippines. Under the contract, Single Star shall provide managerial services for Triple Star’s Hongkong branch. All said services shall be performed in Hongkong.
Is the compensation for the services of Single Star taxable as income from sources within the Philippines? Explain. (4%)
XII.
Which of the following should not be claimed as deductions from gross income? (1%)
(A) discounts given to senior citizens on certain goods and services.
(B) advertising expense to maintain some form of goodwill for the taxpayer’s business.
(C) salaries and bonuses paid to employees.
(D) interest payment on loans for the purchase of machinery and equipment used in business.
XIII.
Hopeful Corporation obtained a loan from Generous Bank and executed a mortgage on its real property to secure the loan. When Hopeful Corporation failed to pay the loan, Generous Bank extrajudicially foreclosed the mortgage on the property and acquired the same as the highest bidder. A month after the foreclosure, Hopeful Corporation exercised its right of redemption and was able to redeem the property. Is Generous Bank liable to pay capital gains tax as a result of the foreclosure sale? Explain. (4%)
XIV.
Mr. X, a Filipino residing in Alabama, U.S.A., died on January 2, 2013 after undergoing a major heart surgery. He left behind to his wife and two (2) kids several properties, to wit: (4%)
(1) Family home in Makati City;
(2) Condominium unit in Las Piñas City;
(3) Proceeds of health insurance from Take Care, a health maintenance organization in the Philippines; and
(4) Land in Alabama, U.S.A.
The following expenses were paid:
(1) Funeral expenses;
(2) Medical expenses; and
(3) Judicial expenses in the testate proceedings.
(A) What are the items that must be considered as part of the gross estate income of Mr. X?
(B) What are the items that may be considered as deductions from the gross estate?
XV.
When is a pre-assessment notice required under the following cases? (1%)
(A) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return.
(B) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent.
(C) When the excise tax due on excisable articles has been paid.
(D) When an article locally purchased or imported by an exempt person, such as, but not limited to vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.
XVI.
Mr. Tiaga has been a law-abiding citizen diligently paying his income taxes. On May 5, 2014, he was surprised to receive an assessment notice from the Bureau of Internal Revenue (BIR) informing him of a deficiency tax assessment as a result of a mathematical error in the computation of his income tax, as appearing on the face of his income tax return for the year 2011, which he filed on April 15, 2012. Mr. Tiaga believes that there was no such error in the computation of his income tax for the year 2011. Based on the assessment received by Mr. Tiaga, may he already file a protest thereon? (4%)
XVII.
In a civil case for Annulment of Contract of Sale, plaintiff Ma. Reklamo presented in evidence the Contract of Sale which she sought to be annulled. No documentary stamp tax on the Contract of Sale was paid because according to plaintiff Ma. Reklamo, there was no need to pay the same since the sale was not registered with the Register of Deeds. Plaintiff Ma. Reklamo is now offering the Contract of Sale as her evidence. Is the Contract of Sale admissible? (4%)
XVIII.
Madam X owns real property in Caloocan City. On July 1, 2014, she received a notice of assessment from the City Assessor, informing her of a deficiency tax on her property. She wants to contest the assessment. (4%)
(A) What are the administrative remedies available to Madam X in order to contest the assessment and their respective prescriptive periods?
(B) May Madam X refuse to pay the deficiency tax assessment during the pendency of her appeal?
XIX.
The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 65-2012 imposing Value-Added Tax (VAT) on association dues and membership fees collected by condominium corporations from its member condominium-unit owners. The RMC’s validity is challenged before the Supreme Court (SC) by the condominium corporations.
The Solicitor General, counsel for BIR, claims that association dues, membership fees, and other assessment/charges collected by a condominium corporation are subject to VAT since they constitute income payments or compensation for the beneficial services it provides to its members and tenants.
On the other hand, the lawyer of the condominium corporations argues that such dues and fees are merely held in trust by the condominium corporations exclusively for their members and used solely for administrative expenses in implementing the condominium corporations’ purposes. Accordingly, the condominium corporations do not actually render services for a fee subject to VAT.
Whose argument is correct? Decide. (5%)
XX.
During his lifetime, Mr. Sakitin obtained a loan amounting to P10 million from Bangko Uno for the purchase of a parcel of land located in Makati City, using such property as collateral for the loan. The loan was evidenced by a duly notarized promissory note. Subsequently, Mr. Sakitin died. At the time of his death, the unpaid balance of the loan amounted to P2 million. The heirs of Mr. Sakitin deducted the amount of P2 million from the gross estate, as part of the "Claims against the Estate." Such deduction was disallowed by the Bureau of Internal Revenue (BIR) Examiner, claiming that the mortgaged property was not included in the computation of the gross estate. Do you agree with the BIR? Explain. (4%)
XXI.
On August 31, 2014, Haelton Corporation (HC), thru its authorized representative Ms. Pares, sold a 16-storey commercial building known as Haeltown Building to Mr. Belly for P100 million. Mr. Belly, in turn, sold the same property on the same day to Bell Gates, Inc. (BGI) for P200 million. These two (2) transactions were evidenced by two (2) separate Deeds of Absolute Sale notarized on the same day by the same notary public.
Investigations by the Bureau of Internal Revenue (BIR) showed that:
(1) the Deed of Absolute Sale between Mr. Belly and BGI was notarized ahead of the sale between HC and Mr. Belly; (2) as early as May 17, 2014, HC received P40 million from BGI, and not from Mr. Belly; (3) the said payment of P40 million was recorded by BGI in its books as of June 30, 2014 as investment in Haeltown Building; and (4) the substantial portion of P40 million was withdrawn by Ms. Pares through the declaration of cash dividends to all its stockholders.
Based on the foregoing, the BIR sent Haeltown Corporation a Notice of Assessment for deficiency income tax arising from an alleged simulated sale of the aforesaid commercial building to escape the higher corporate income tax rate of thirty percent (30%). What is the liability of Haeltown Corporation, if any? (4%)
XXII.
Choose the correct answer. Double Taxation - (1%)
(A) is one of direct duplicate taxations wherein two (2) taxes must be imposed on the same subject matter, by the same taxing authority, within the same jurisdiction, during the same period, with the same kind or character of tax, even if the purposes of imposing the same are different.
(B) is forbidden by law; and therefore, it is a valid defense against the validity of a tax measure.
(C) means taxing the same property twice when it should be taxed only once; it is tantamount to taxing the same person twice by the same jurisdiction for the same thing.
(D) exists when a corporation is assessed with local business tax as a manufacturer, and at the same time, value-added tax as a person selling goods in the course of trade or business.
XXIII.
Choose the correct answer. Tax Avoidance ‒ (1%)
(A) is a scheme used outside of those lawful means and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.
(B) is a tax saving device within the means sanctioned by law.
(C) is employed by a corporation, the organization of which is prompted more on the mitigation of tax liabilities than for legitimate business purpose.
(D) is any form of tax deduction scheme, regardless if the same is legal or not.
XXIV.
A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that they can practice their profession as lawyers. For the year 2012, ABC Law Firm received earnings and paid expenses, among which are as follows: (6%)
Earnings:
(1) Professional/legal fees from various clients
(2) Cash prize received from a religious society in recognition of the exemplary service of ABC Law Firm
(3) Gains derived from sale of excess computers and laptops
Payments:
(1) Salaries of office staff
(2) Rentals for office space
(3) Representation expenses incurred in meetings with clients
(A) What are the items in the above mentioned earnings which should be included in the computation of ABC Law Firm’s gross income? Explain.
(B) What are the items in the above-mentioned payments which may be considered as deductions from the gross income of ABC Law Firm? Explain.
(C) If ABC Law Firm earns net income in 2012, what, if any, is the tax consequence on the part of ABC Law Firm insofar as the payment of income tax is concerned? What, if any, is the tax consequence on the part of A, B, and C as individual partners, insofar as the payment of income tax is concerned?
XXV.
Which of the following transactions is subject to Value-Added Tax (VAT)? (1%)
(A) Sale of shares of stock-listed and traded through the local stock exchange
(B) Importation of personal and household effects belonging to residents of the Philippines returning from abroad subject to custom duties under the Tariff and Customs Code
(C) Services rendered by individuals pursuant to an employeremployee relationship
(D) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority
XXVI.
Freezy Corporation, a domestic corporation engaged in the manufacture and sale of ice cream, made payments to an officer of Frosty Corporation, a competitor in the ice cream business, in exchange for said officer’s revelation of Frosty Corporation’s trade secrets.
May Freezy Corporation claim the payment to the officer as deduction from its gross income? Explain. (4%)
XXVII.
In January 2013, your friend got his first job as an o ffice clerk. He is single and lives with his family who depends upon him for financial support. His parents have long retired from their work, and his two (2) siblings are still minors and studying in grade school. In February 2014, he consulted you as he wanted to comply with all the rules pertaining to the preparation and filing of his income tax return. He now asks you the following:
(A) Is he entitled to personal exemptions? If so, how much? (1%)
(B) Is he entitled to additional exemptions? If so, how much? (1%)
(C) What is the effect of the taxes withheld from his salaries on his taxable income? (2%)
XXVIII.
Choose the correct answer. Tax laws - (1%)
(A) may be enacted for the promotion of private enterprise or business for as long as it gives incidental advantage to the public or the State
(B) are inherently legislative; therefore, may not be delegated
(C) are territorial in nature; hence, they do not recognize the generally-accepted tenets of international law
(D) adhere to uniformity and equality when all taxable articles or kinds of property of the same class are taxable at the same rate
XXIX.
Doña Evelina, a rich widow engaged in the business of currency exchange, was assessed a considerable amount of local business taxes by the City Government of Bagnet by virtue of Tax Ordinance No. 24. Despite her objections thereto, Doña Evelina paid the taxes. Nevertheless, unsatisfied with said Tax Ordinance, Doña Evelina, through her counsel Atty. ELP, filed a written claim for recovery of said local business taxes and contested the assessment. Her claim was denied, and so Atty. ELP elevated her case to the Regional Trial Court (RTC).
The RTC declared Tax Ordinance No. 24 null and void and without legal effect for having been enacted in violation of the public ation requirement of tax ordinances and revenue measures under the Local Government Code (LGC) and on the ground of double taxation. On appeal, the Court of Tax Appeals (CTA) affirmed the decision of the RTC. No motion for reconsideration was filed and the decision became final and executory. (4%)
(A) If you are Atty. ELP, what advice will you give Doña Evelina so that she can recover the subject local business taxes?
(B) If Doña Evelina eventually recovers the local business taxes, must the same be considered as income taxable by the national government?
---ooo0ooo---
I.
In its final adjustment return for the 2010 taxable year, ABC Corp. had excess tax credits arising from its over-withholding of income payments. It opted to carry over the excess tax credits to the following year. Subsequently, ABC Corp. changed its mind and applied for a refund of the excess tax credits.
Will the claim for refund prosper? (6%)
II.
A group of philanthropists organized a non-stock, non-profit hospital for charitable purposes to provide medical services to the poor. The hospital also accepted paying patients although none of its income accrued to any private individual; all income were plowed back for the hospital's use and not more than 30% of its funds were used for administrative purposes.
Is the hospital subject to tax on its income? If it is, at what rate? (6%)
III.
ABC Corporation is registered as a holding company and has an office in the City of Makati. It has no actual business operations. It invested in another company and its earnings are limited to dividends from this investment, interests on its bank deposits, and foreign exchange gains from its foreign currency account. The City of Makati assessed ABC Corporation as a contractor or one that sells services for a fee. Is the City of Makati correct? (6%)
IV.
Atty. Gambino is a partner in a general professional partnership. The partnership computes its gross revenues, claims deductions allowed under the Tax Code, and distributes the net income to the partners, including Atty. Gambino, in accordance with its articles of partnership.
In filing his own income tax return, Atty. Gambino claimed deductions that the partnership did not claim, such as purchase of law books, entertainment expenses, car insurance and car depreciation. The BIR disallowed the deductions.
Was the BIR correct? (6%)
V.
Mr. Agustin, 75 years old and suffering from an incurable disease, decided to sell for valuable and sufficient consideration a house and lot to his son. He died one year later.
In the settlement of Mr. Agustin's estate, the BIR argued that the house and lot were transferred in contemplation of death and should therefore form part of the gross estate for estate tax purposes.
Is the BIR correct? (7%)
VI.
On October 15, 2005, ABC Corp. imported 1,000 kilos of steel ingots and paid customs duties and VAT to the Bureau of Customs on the importation. On February 17, 2009, the Bureau of Customs, citing provisions of the Tariff and Customs Code on post-audit, investigated and assessed ABC Corp. for deficiency customs duties and VAT.
Is the Bureau of Customs correct? (7%)
VII.
XYZ Law Offices, a law partnership in the Philippines and a VAT-registered taxpayer, received a query by e-mail from Gainsburg Corporation, a corporation organized under the laws of Delaware, but the e-mail came from California where Gainsburg has an office. Gainsburg has no office in the Philippines and does no business in the Philippines.
XYZ Law Offices rendered its opinion on the query and billed Gainsburg US$1,000 for the opinion. Gainsburg remitted its payment through Citibank which converted the remitted US$1 ,000 to pesos and deposited the converted amount in the XYZ Law Offices account.
What are the tax implications of the payment to XYZ Law Offices in terms of VAT and income taxes? (7%)
VIII.
Mr. Amado leased a piece of land owned by the Municipality of Pinagsabitan and built a warehouse on the property for his business operations. The Municipal Assessor assessed Mr. Amado for real property taxes on the land and the warehouse. Mr. Amado objected to the assessment, contending that he should not be asked to pay realty taxes on the land since it is municipal property.
Was the assessment proper? (5%)
IX.
In the settlement of the estate of Mr. Barbera who died intestate, his wife renounced her inheritance and her share of the conjugal property in favor of their children. The BIR determined that there was a taxable gift and thus assessed Mrs. Barbera as a donor.
Was the BIR correct? (7%)
X.
In 2010, pursuant to a Letter of Authority (LA) issued by the Regional Director, Mr. Abcede was assessed deficiency income taxes by the BIR for the year 2009. He paid the deficiency. In 2011, Mr. Abcede received another LA for the same year 2009, this time from the National Investigation Division, on the ground that Mr. Abcede's 2009 return was fraudulent.
Mr. Abcede contested the LA on the ground that he can only be investigated once in a taxable year. Decide. (7%)
XI.
In 2000, Mr. Belen bought a residential house and lot for P1,000,000. He used the property as his and his family's principal residence. It is now year 2013 and he is thinking of selling the property to buy a new one. He seeks your advice on how much income tax he would pay if he sells the property. The total zonal value of the property is P5,000,000 and the fair market value per the tax declaration is P2,500,000. He intends to sell it forP6,000,000.
What material considerations will you take into account in computing the income tax? Please explain the legal relevance of each of these considerations. (7%)
XII.
You are the retained tax counsel of ABC Corp. Your client informed you that they have been directly approached with a proposal by a BIR insider (i.e., a middle rank BIR official) on the tax matter they have referred to you for handling. The BIR insider's proposal is to settle the matter by significantly reducing the assessment, but he will get 50% of the savings arising from the reduced assessment.
What tax, criminal and ethical considerations will you take into account in giving your advice? Explain the relevance of each of these considerations. (9%)
MULTIPLE CHOICE QUESTIONS
I. ABC Corp. was dissolved and liquidating dividends were declared and paid to the stockholders.
What tax consequence follows? (1%)
(A) ABC Corp. should deduct a final tax of 10% from the dividends.
(B) The stockholders should declare their gain from their investment and pay income tax at the ordinary rates.
(C) The dividends are exempt from tax.
(D) ABC Corp. should withhold a 10% creditable tax.
II. MGC Corp. secured an income tax holiday for 5 years as a pioneer industry. On the fourth year of the tax holiday, MGC Corp. declared and paid cash dividends to its stockholders, all of whom are individuals.
Are the dividends taxable? (1%)
(A) The dividends are taxable; the tax exemption of MGC Corp. does not extend to its stockholders.
(B) The dividends are tax exempt because of MGC Corp.'s income tax holiday.
(C) The dividends are taxable if they exceed 50% of MGC Corp.'s retained earnings.
(D) The dividends are exempt if paid before the end of MGC Corp.'s fiscal year.
III. Mr. Alas sells shoes in Makati through a retail store. He pays the VAT on his gross sales to the BIR and the municipal license tax based on the same gross sales to the City of Makati. He comes to you for advice because he thinks he is being subjected to double taxation.
What advice will you give him? (1%)
(A) Yes, there is double taxation and it is oppressive.
(B) The City of Makati does not have this power.
(C) Yes, there is double taxation and this is illegal m the Philippines.
(D) Double taxation is allowed where one tax is imposed by the national government and the other by the local government.
IV. Congress passed a sin tax law that increased the tax rates on cigarettes by 1,000%. The law was thought to be sufficient to drive many cigarette companies out of business, and was questioned in court by a cigarette company that would go out of business because it would not be able to pay the increased tax.
The cigarette company is __________ (1%)
(A) wrong because taxes are the lifeblood of the government
(B) wrong because the law recognizes that the power to tax is the power to destroy
(C) correct because no government can deprive a person of his livelihood
(D) correct because Congress, in this case, exceeded its power to tax
V. Mr. Alvarez is in the retail business. He received a deficiency tax assessment from the BIR containing only the computation of the deficiency tax and the penalties, without any explanation of the factual and legal bases for the assessment.
Is the assessment valid? (1%)
(A) The assessment is valid; all that Mr. Alvarez has to know is the amount of the tax.
(B) The assessment is invalid; the law requires a statement of the facts and the law upon which the assessment is based.
(C) The assessment is valid but Mr. Alvarez can still contest it.
(D) The assessment is invalid because Mr. Alvarez has no way to determine if the computation is erroneous.
VI. In 2010, Mr. Platon sent his sister Helen $1 ,000 via a telegraphic transfer through the Bank of PI. The bank's remittance clerk made a mistake and credited Helen with $1,000,000 which she promptly withdrew. The bank demanded the return of the mistakenly credited excess, but Helen refused. The BIR entered the picture and investigated Helen.
Would the BIR be correct if it determines that Helen earned taxable income under these facts? (1%)
(A) No, she had no income because she had no right to the mistakenly credited funds.
(B) Yes, income is income regardless of the source.
(C) No, it was not her fault that the funds in excess of $1,000 were credited to her.
(D) No, the funds in excess of$1,000 were in effect donated to her.
VII. The municipality of San Isidro passed an ordinance imposing a tax on installation managers. At that time, there was only one installation manager in the municipality; thus, only he would be liable for the tax.
Is the law constitutional? (1%)
(A) It is unconstitutional because it clearly discriminates against this person.
(B) It is unconstitutional for lack of legal basis.
(C) It is constitutional as it applies to all persons in that class.
(D) It is constitutional because the power to tax is the power to destroy.
VIII. XYZ Corporation manufactures glass panels and is almost at the point of insolvency. It has no more cash and all it has are unsold glass panels. It received an assessment from the BIR for deficiency income taxes. It wants to pay but due to lack of cash, it seeks permission to pay in kind with glass panels.
Should the BIR grant the requested permission? (1%)
(A) It should grant permission to make payment convenient to taxpayers.
(B) It should not grant permission because a tax is generally a pecuniary burden.
(C) It should grant permission; otherwise, XYZ Corporation would not be able to pay.
(D) It should not grant permission because the government does not have the storage facilities for glass panels.
IX. Prior to the VAT law, sales of cars were subject to a sales tax but the tax applied only to the original or the first sale; the second and subsequent sales were not subject to tax.
Deltoid Motors, Inc. (Deltoid) hit on the idea of setting up a wholly-owned subsidiary, Gonmad Motors, Inc. (Gonmad), and of selling its assembled cars to Gonmad at a low price so it would pay a lower tax on the first sale. Gonmad would then sell the cars to the public at a higher price without paying any sales tax on this subsequent sale.
Characterize the arrangement. (1%)
A. The plan is a legitimate exercise of tax planning and merely takes advantage of a loophole in the law.
B. The plan is legal because the government collects taxes anyway.
C. The plan is improper; the veil of corporate fiction can be pierced so that the second sale will be considered the taxable sale.
D. The government must respect Gonmad's separate juridical personality and Deltoid's taxable sale to it.
X. PRT Corp. purchased a residential house and lot with a swimming pool in an upscale subdivision and required the company president to stay there without paying rent; it reasoned out that the company president must maintain a certain image and be able to entertain guests at the house to promote the company's business. The company president declared that because they are childless, he and his wife could very well live in a smaller house.
Was there a taxable fringe benefit? (1%)
(A) There was no taxable fringe benefit since it was for the convenience of the employer and was necessary for its business.
(B) There was a taxable fringe benefit since the stay at the house was for free.
(C) There was a taxable fringe benefit because the house was very luxurious.
(D) There was no taxable fringe benefit because the company president was only required to stay there and did not demand free housing.
XI. Taxpayer A was required by the BIR to sign and submit a waiver of the statute of limitations on the assessment period, to give the BIR more time to complete its investigation. The BIR accepted the waiver but failed to indicate the date of its acceptance.
What is the legal status of the waiver? (1%)
(A) The waiver is valid because the date of acceptance is immaterial and unimportant.
(B) The waiver is invalid; the taxpayer cannot be required to waive the statute of limitations.
(C) The waiver is invalid; the date of acceptance is crucial in counting the start of the period of suspension of the prescriptive period.
(D) The waiver is valid, having been accepted by the BIR.
XII. Taxpayer Andy received on January 3, 2010 a preliminary assessment notice (PAN) from the BIR, stating that he had fifteen (15) days from its receipt to comment or to file a protest. Eight (8) days later (or on January11, 2010), before he could comment or file a protest, Andy received the final assessment notice (FAN).
Decide on the validity of the FAN. (1%)
(A) The FAN is invalid; Andy was not given the chance to respond to the PAN, in violation of his due process rights.
(B) The FAN is invalid for being premature.
(C) The FAN is valid since it was issued before the right to assess prescribed.
(D) The FAN is valid. There is no legal requirement that the FAN should await the protest to the PAN because protest to the PAN is not mandatory.
XIII. MSI Corp. imports orange and lemon concentrates as raw materials for the fruit drinks it sells locally. The Bureau of Customs (BOC) imposed a 1% duty rate on the concentrates. Subsequently, the BOC changed its position and held that the concentrates should be taxed at 7% duty rate. MSI disagreed with the ruling and questioned it in the CTA which upheld MSI's position. The Commissioner of Customs appealed to the CTA en bane without filing a motion for reconsideration.
Resolve the appeal. (1%)
(A) The appeal should be dismissed because a motion for reconsideration is mandatory.
(B) The appeal should be dismissed for having been filed out of time.
(C) The appeal should be given due course since a motion for reconsideration is a useless exercise.
(D) The appeal should be upheld to be fair to the government which needs taxes.
XIV. The spouses Jun and Elvira Sandoval purchased a piece of land for P5,000,000 and included their two (2) minor children as co-purchasers in the Deed of Absolute Sale. The Commissioner of Internal Revenue (CIR) ruled that there was an implied donation and assessed donors' taxes against the spouses.
Rule on the CIR's action. (1%)
(A) The CIR is wrong; a donation must be express.
(B) The CIR is wrong; financial capacity is not a requirement for a valid sale.
(C) The CIR is correct; the amount involved is huge and ultimately ends up with the children.
(D) The CIR is correct; there was animus donandi since the children had no financial capacity to be co-purchasers.
XV. Pheleco is a power generation and distribution company operating mainly from the City of Taguig. It owns electric poles which it also rents out to other companies that use poles such as telephone and cable companies. Taguig passed an ordinance imposing a fee equivalent to 1% of the annual rental for these poles. Pheleco questioned 'the legality of the ordinance on the ground that it imposes an income tax which local government units (LGUs) are prohibited from imposing.
Rule on the validity of the ordinance. (1%)
(A) The ordinance is void; the fee is based on rental income and is therefore a tax on income.
(B) The ordinance is valid as a legitimate exercise of police power to regulate electric poles.
(C) The ordinance is void; 1% of annual rental is excessive and oppressive.
(D) The ordinance is valid; an LGU may impose a tax on income.
XVI. Aleta sued Boboy for breach of promise to marry. Boboy lost the case and duly paid the court's award that included, among others, Pl00,000 as moral damages for the mental anguish Aleta suffered.
Did Aleta earn a taxable income? (1%)
(A) She had a taxable income of P100,000 since income is income from whatever source.
(B) She had no taxable income because it was a donation.
(C) She had taxable income since she made a profit.
(D) She had no taxable income since moral damages are compensatory.
XVII. Mr. Mayuga donated his residential house and lot to his son and duly paid the donor's tax. In the Deed of Donation, Mr. Mayuga expressly reserved for himself the usufruct over the property for as long as he lived.
Describe the donated property from the taxation perspective. (1%)
(A) The property will form part of Mr. Mayuga's gross estate when he dies.
(B) The property will not fom1 part of Mr. Mayuga's gross estate when he dies because he paid the donor's tax.
(C) The property will form part of Mr. Mayuga's gross estate because he died soon after the donation.
(D) The property will not form part of Mr. Mayuga's gross estate because it is no longer his.
XVIII. Mr. Z made an importation which he declared at the Bureau of Customs (BOC) as "Used Truck Replacement Parts". Upon investigation, the container vans contained 15 units of Porsche and Ferrari cars.
Characterize Mr. Z's action. (1%)
(A) Mr. Z committed smuggling.
(B) Mr. Z did not commit smuggling because he submitted his shipment to BOC examination.
(C) Mr. Z only made a misdeclaration, but did not commit smuggling.
(D) Mr. Z did not commit smuggling because the shipment has not left the customs area.
XIX. Mr. A was preparing his income tax return and had some doubt on whether a commission he earned should be declared for the current year or for the succeeding year. He sought the opinion of his lawyer who advised him to report the commission in the succeeding year. He heeded his lawyer's advice and reported the commission in the succeeding year. The lawyer's advice turned out to be wrong; in Mr. A's petition against the BIR assessment, the court ruled against Mr. A.
Is Mr. A guilty of fraud? (1%)
(A) Mr. A is not guilty of fraud as he simply followed the advice of his lawyer.
(B) Mr. A is guilty of fraud; he deliberately did not report the commission in the current year when he should have done so.
(C) Mr. A's lawyer should pay the tax for giving the wrong advice.
(D) Mr. A is guilty for failing to consult his accountant.
XX. The BIR, through the Commissioner, instituted a system requiring taxpayers to submit to the BIR a summary list of their sales and purchases during the year, indicating the name of the seller or the buyer and the amount. Based on these lists, the BIR discovered that in 2004 ABC Corp. purchased from XYZ Corp. goods worthP5,000,000. XYZ Corp. did not declare these for income tax purposes as its reported gross sales for 2004was only Pl,000,000.
Which of the following defenses may XYZ Corp. interpose in an assessment against it by the BIR? (1%)
(A) The BIR has no authority to obtain third party information to assess taxpayers.
(B) The third party information is inadmissible as hearsay evidence.
(C) The system of requiring taxpayers to submit third party information is illegal for violating the right to privacy.
(D) None of the above.
NOTHING FOLLOWS
2014 BAR
I.
On March 27, 2012, the Bureau of Internal Revenue (BIR) issued a notice of assessment against Blue Water Industries Inc. (BWI), a domestic corporation, informing the latter of its alleged deficiency corporate income tax for the year 2009. On April 20, 2012, BWI filed a letter protest before the BIR contesting said assessment and demanding that the same be cancelled or set aside.
However, on May 19, 2013, that is, after more than a year from the filing of the letter protest, the BIR informed BWI that the latter’s letter protest was denied on the ground that the assessment had already become final, executory and demandable. The BIR reasoned that its failure to decide the case within 180 days from filing of the letter protest should have prompted BWI to seek recourse before the Court of Tax Appeals (CTA) by filing a petition for review within thirty (30) days after the expiration of the 180-day period as mandated by the provisions of the last paragraph of Section 228 of the National Internal Revenue Code (NIRC). Accordingly, BWI’s failure to file a petition for review before the CTA rendered the assessment final, executory and demandable. Is the contention of the BIR correct? Explain. (5%)
II.
Mr. De Sarapen is a candidate in the upcoming Senatorial elections. Mr. De Almacen, believing in the sincerity and ability of Mr. De Sarapen to introduce much needed reforms in the country, contributed P500,000.00 in cash to the campaign chest of Mr. De Sarapen. In addition, Mr. De Almacen purchased tarpaulins, t-shirts, umbrellas, caps and other campaign materials that he also donated to Mr. De Sarapen for use in his campaign. Is the contribution of cash and campaign materials subject to donor’s tax? (4%)
III.
Dr. Taimtim is an alumnus of the College of Medicine of Universal University (UU), a privately-owned center for learning which grants yearly dividends to its stockholders.
UU has a famous chapel located within the campus where the old folks used to say that anyone who wanted to pass the medical board examinations should offer a dozen roses on all the Sundays of October. This was what Dr. Taimtim did when he was still reviewing for the board examinations. In his case, the folk saying proved to be true because he is now a successful cardiologist. Wanting to give back to the chapel and help defray the costs of its maintenance, Dr. Taimtim donated P50,000.00 to the caretakers of the chapel which was evidenced by an acknowledgment receipt.
In computing his net taxable income, can Dr.Taimtim use his donation to the chapel as an allowable deduction from his gross income under the National Internal Revenue Code (NIRC)? (4%)
IV.
Gangwam Corporation (GC) filed its quarterly tax returns for the calendar year 2012 as follows:
First quarter - April 25, 2012
Second quarter - July 23, 2012
Third quarter - October 25, 2012
Fourth quarter - January 27, 2013
On December 22, 2013, GC filed with the Bureau of Internal Revenue (BIR) an administrative claim for refund of its unutilized input Value-Added Tax (VAT) for the calendar year 2012. After several months of inaction by the BIR on its claim for refund, GC decided to elevate its claim directly to the Court of Tax Appeals (CTA) on April 22, 2014.
In due time, the CTA denied the tax refund relative to the input VAT of GC for the first quarter of 2012, reasoning that the claim was filed beyond the two-year period prescribed under Section 112(A) of the National Internal Revenue Code (NIRC).
(A) Is the CTA correct? (3%)
(B) Assuming that GC filed its claim before the CTA on February 22, 2014, would your answer be the same? (3%)
V.
The City of Liwliwa assessed local business taxes against Talin Company. Claiming that there is double taxation, Talin Company filed a Complaint for Refund or Recovery of Illegally and/or Erroneously-collected Local Business Tax; Prohibition with Prayer to Issue Temporary Restraining Order and Writ of Preliminary Injunction with the Regional Trial Court (RTC). The RTC denied the application for a Writ of Preliminary Injunction. Since its motion for reconsideration was denied, Talin Company filed a special civil action for certiorari with the Court of Appeals (CA). The government lawyer representing the City of Liwliwa prayed for the dismissal of the petition on the ground that the same should have been filed with the Court of Tax Appeals (CTA). Talin Company, through its lawyer, Atty. Frank, countered that the CTA cannot entertain a petition for certiorari since it is not one of its powers and authorities under existing laws and rules.
Decide. (5%)
VI.
Choose the correct answer. Smuggling - (1%)
(A) does not extend to the entry of imported or exported articles by means of any false or fraudulent invoice, statement or practices; the entry of goods at less than the true weight or measure; or the filing of any false or fraudulent entry for the payment of drawback or refund of duties.
(B) is limited to the import of contraband or highly dutiable cargo beyond the reach of customs authorities.
(C) is committed by any person who shall fraudulently import or bring into the Philippines, or assist in so doing, any article, contrary to law, or shall receive, conceal, buy, sell or any manner facilitate the transportation, concealment or sale of such article after importation, knowing the same to have been imported contrary to law.
VII.
In accordance with the Local Government Code (LGC), the Sangguniang Panglungsod (SP) of Baguio City enacted Tax Ordinance No. 19, Series of 2014, imposing a P50.00 tax on all the tourists and travellers going to Baguio City. In imposing the local tax, the SP reasoned that the tax collected will be used to maintain the cleanliness of Baguio City and for the beautification of its tourist attractions. (D) is punishable by administrative penalty only.
Claiming the tax to be unjust, Baguio Travellers Association (BTA), an association of travel agencies in Baguio City, filed a petition for declaratory relief before the Regional Trial Court (RTC) because BTA was apprehensive that tourists might cancel their bookings with BTA’s member agencies. BTA also prayed for the issuance of a Temporary Restraining Order (TRO) to enjoin Baguio City from enforcing the local tax on their customers and on all tourists going to Baguio City.
The RTC issued a TRO enjoining Baguio City from imposing the local tax. Aggrieved, Baguio City filed a petition for certiorari before the Supreme Court (SC) seeking to set aside the TRO issued by the RTC on the ground that collection of taxes cannot be enjoined. Will the petition prosper? (5%)
VIII.
Masarap Kumain, Inc. (MKI) is a Value-Added Tax (VAT)-registered company which has been engaged in the catering business for the past 10 years. It has invested a substantial portion of its capital on flat wares, table linens, plates, chairs, catering equipment, and delivery vans. MKI sold its first delivery van, already 10 years old and idle, to Magpapala Gravel and Sand Corp. (MGSC), a corporation engaged in the business of buying and selling gravel and sand. The selling price of the delivery van was way below its acquisition cost. Is the sale of the delivery van by MKI to MGSC subject to VAT? (4%)
IX.
Mr. Gipit borrowed from Mr. Maunawain P100,000.00, payable in five (5) equal monthly installments. Before the first installment became due, Mr. Gipit rendered general cleaning services in the entire office building of Mr. Maunawain, and as compensation therefor, Mr. Maunawain cancelled the indebtedness of Mr. Gipit up to the amount of P75,000.00. Mr. Gipit claims that the cancellation of his indebtedness cannot be considered as gain on his part which must be subject to income tax, because according to him, he did not actually receive payment from Mr. Maunawain for the general cleaning services. Is Mr. Gipit correct? Explain. (4%)
X.
Which of the following is an exclusion from gross income? (1%)
(A) Salaries and wages
(B) Cash dividends
(C) Liquidating dividends after dissolution of a corporation
(D) De minimis benefits
(E) Embezzled money
XI.
Triple Star, a domestic corporation, entered into a Management Service Contract with Single Star, a non-resident foreign corporation with no property in the Philippines. Under the contract, Single Star shall provide managerial services for Triple Star’s Hongkong branch. All said services shall be performed in Hongkong.
Is the compensation for the services of Single Star taxable as income from sources within the Philippines? Explain. (4%)
XII.
Which of the following should not be claimed as deductions from gross income? (1%)
(A) discounts given to senior citizens on certain goods and services.
(B) advertising expense to maintain some form of goodwill for the taxpayer’s business.
(C) salaries and bonuses paid to employees.
(D) interest payment on loans for the purchase of machinery and equipment used in business.
XIII.
Hopeful Corporation obtained a loan from Generous Bank and executed a mortgage on its real property to secure the loan. When Hopeful Corporation failed to pay the loan, Generous Bank extrajudicially foreclosed the mortgage on the property and acquired the same as the highest bidder. A month after the foreclosure, Hopeful Corporation exercised its right of redemption and was able to redeem the property. Is Generous Bank liable to pay capital gains tax as a result of the foreclosure sale? Explain. (4%)
XIV.
Mr. X, a Filipino residing in Alabama, U.S.A., died on January 2, 2013 after undergoing a major heart surgery. He left behind to his wife and two (2) kids several properties, to wit: (4%)
(1) Family home in Makati City;
(2) Condominium unit in Las Piñas City;
(3) Proceeds of health insurance from Take Care, a health maintenance organization in the Philippines; and
(4) Land in Alabama, U.S.A.
The following expenses were paid:
(1) Funeral expenses;
(2) Medical expenses; and
(3) Judicial expenses in the testate proceedings.
(A) What are the items that must be considered as part of the gross estate income of Mr. X?
(B) What are the items that may be considered as deductions from the gross estate?
XV.
When is a pre-assessment notice required under the following cases? (1%)
(A) When the finding for any deficiency tax is the result of mathematical error in the computation of the tax as appearing on the face of the return.
(B) When a discrepancy has been determined between the tax withheld and the amount actually remitted by the withholding agent.
(C) When the excise tax due on excisable articles has been paid.
(D) When an article locally purchased or imported by an exempt person, such as, but not limited to vehicles, capital equipment, machineries and spare parts, has been sold, traded or transferred to non-exempt persons.
XVI.
Mr. Tiaga has been a law-abiding citizen diligently paying his income taxes. On May 5, 2014, he was surprised to receive an assessment notice from the Bureau of Internal Revenue (BIR) informing him of a deficiency tax assessment as a result of a mathematical error in the computation of his income tax, as appearing on the face of his income tax return for the year 2011, which he filed on April 15, 2012. Mr. Tiaga believes that there was no such error in the computation of his income tax for the year 2011. Based on the assessment received by Mr. Tiaga, may he already file a protest thereon? (4%)
XVII.
In a civil case for Annulment of Contract of Sale, plaintiff Ma. Reklamo presented in evidence the Contract of Sale which she sought to be annulled. No documentary stamp tax on the Contract of Sale was paid because according to plaintiff Ma. Reklamo, there was no need to pay the same since the sale was not registered with the Register of Deeds. Plaintiff Ma. Reklamo is now offering the Contract of Sale as her evidence. Is the Contract of Sale admissible? (4%)
XVIII.
Madam X owns real property in Caloocan City. On July 1, 2014, she received a notice of assessment from the City Assessor, informing her of a deficiency tax on her property. She wants to contest the assessment. (4%)
(A) What are the administrative remedies available to Madam X in order to contest the assessment and their respective prescriptive periods?
(B) May Madam X refuse to pay the deficiency tax assessment during the pendency of her appeal?
XIX.
The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 65-2012 imposing Value-Added Tax (VAT) on association dues and membership fees collected by condominium corporations from its member condominium-unit owners. The RMC’s validity is challenged before the Supreme Court (SC) by the condominium corporations.
The Solicitor General, counsel for BIR, claims that association dues, membership fees, and other assessment/charges collected by a condominium corporation are subject to VAT since they constitute income payments or compensation for the beneficial services it provides to its members and tenants.
On the other hand, the lawyer of the condominium corporations argues that such dues and fees are merely held in trust by the condominium corporations exclusively for their members and used solely for administrative expenses in implementing the condominium corporations’ purposes. Accordingly, the condominium corporations do not actually render services for a fee subject to VAT.
Whose argument is correct? Decide. (5%)
XX.
During his lifetime, Mr. Sakitin obtained a loan amounting to P10 million from Bangko Uno for the purchase of a parcel of land located in Makati City, using such property as collateral for the loan. The loan was evidenced by a duly notarized promissory note. Subsequently, Mr. Sakitin died. At the time of his death, the unpaid balance of the loan amounted to P2 million. The heirs of Mr. Sakitin deducted the amount of P2 million from the gross estate, as part of the "Claims against the Estate." Such deduction was disallowed by the Bureau of Internal Revenue (BIR) Examiner, claiming that the mortgaged property was not included in the computation of the gross estate. Do you agree with the BIR? Explain. (4%)
XXI.
On August 31, 2014, Haelton Corporation (HC), thru its authorized representative Ms. Pares, sold a 16-storey commercial building known as Haeltown Building to Mr. Belly for P100 million. Mr. Belly, in turn, sold the same property on the same day to Bell Gates, Inc. (BGI) for P200 million. These two (2) transactions were evidenced by two (2) separate Deeds of Absolute Sale notarized on the same day by the same notary public.
Investigations by the Bureau of Internal Revenue (BIR) showed that:
(1) the Deed of Absolute Sale between Mr. Belly and BGI was notarized ahead of the sale between HC and Mr. Belly; (2) as early as May 17, 2014, HC received P40 million from BGI, and not from Mr. Belly; (3) the said payment of P40 million was recorded by BGI in its books as of June 30, 2014 as investment in Haeltown Building; and (4) the substantial portion of P40 million was withdrawn by Ms. Pares through the declaration of cash dividends to all its stockholders.
Based on the foregoing, the BIR sent Haeltown Corporation a Notice of Assessment for deficiency income tax arising from an alleged simulated sale of the aforesaid commercial building to escape the higher corporate income tax rate of thirty percent (30%). What is the liability of Haeltown Corporation, if any? (4%)
XXII.
Choose the correct answer. Double Taxation - (1%)
(A) is one of direct duplicate taxations wherein two (2) taxes must be imposed on the same subject matter, by the same taxing authority, within the same jurisdiction, during the same period, with the same kind or character of tax, even if the purposes of imposing the same are different.
(B) is forbidden by law; and therefore, it is a valid defense against the validity of a tax measure.
(C) means taxing the same property twice when it should be taxed only once; it is tantamount to taxing the same person twice by the same jurisdiction for the same thing.
(D) exists when a corporation is assessed with local business tax as a manufacturer, and at the same time, value-added tax as a person selling goods in the course of trade or business.
XXIII.
Choose the correct answer. Tax Avoidance ‒ (1%)
(A) is a scheme used outside of those lawful means and, when availed of, it usually subjects the taxpayer to further or additional civil or criminal liabilities.
(B) is a tax saving device within the means sanctioned by law.
(C) is employed by a corporation, the organization of which is prompted more on the mitigation of tax liabilities than for legitimate business purpose.
(D) is any form of tax deduction scheme, regardless if the same is legal or not.
XXIV.
A, B, and C, all lawyers, formed a partnership called ABC Law Firm so that they can practice their profession as lawyers. For the year 2012, ABC Law Firm received earnings and paid expenses, among which are as follows: (6%)
Earnings:
(1) Professional/legal fees from various clients
(2) Cash prize received from a religious society in recognition of the exemplary service of ABC Law Firm
(3) Gains derived from sale of excess computers and laptops
Payments:
(1) Salaries of office staff
(2) Rentals for office space
(3) Representation expenses incurred in meetings with clients
(A) What are the items in the above mentioned earnings which should be included in the computation of ABC Law Firm’s gross income? Explain.
(B) What are the items in the above-mentioned payments which may be considered as deductions from the gross income of ABC Law Firm? Explain.
(C) If ABC Law Firm earns net income in 2012, what, if any, is the tax consequence on the part of ABC Law Firm insofar as the payment of income tax is concerned? What, if any, is the tax consequence on the part of A, B, and C as individual partners, insofar as the payment of income tax is concerned?
XXV.
Which of the following transactions is subject to Value-Added Tax (VAT)? (1%)
(A) Sale of shares of stock-listed and traded through the local stock exchange
(B) Importation of personal and household effects belonging to residents of the Philippines returning from abroad subject to custom duties under the Tariff and Customs Code
(C) Services rendered by individuals pursuant to an employeremployee relationship
(D) Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered with the Cooperative Development Authority
XXVI.
Freezy Corporation, a domestic corporation engaged in the manufacture and sale of ice cream, made payments to an officer of Frosty Corporation, a competitor in the ice cream business, in exchange for said officer’s revelation of Frosty Corporation’s trade secrets.
May Freezy Corporation claim the payment to the officer as deduction from its gross income? Explain. (4%)
XXVII.
In January 2013, your friend got his first job as an o ffice clerk. He is single and lives with his family who depends upon him for financial support. His parents have long retired from their work, and his two (2) siblings are still minors and studying in grade school. In February 2014, he consulted you as he wanted to comply with all the rules pertaining to the preparation and filing of his income tax return. He now asks you the following:
(A) Is he entitled to personal exemptions? If so, how much? (1%)
(B) Is he entitled to additional exemptions? If so, how much? (1%)
(C) What is the effect of the taxes withheld from his salaries on his taxable income? (2%)
XXVIII.
Choose the correct answer. Tax laws - (1%)
(A) may be enacted for the promotion of private enterprise or business for as long as it gives incidental advantage to the public or the State
(B) are inherently legislative; therefore, may not be delegated
(C) are territorial in nature; hence, they do not recognize the generally-accepted tenets of international law
(D) adhere to uniformity and equality when all taxable articles or kinds of property of the same class are taxable at the same rate
XXIX.
Doña Evelina, a rich widow engaged in the business of currency exchange, was assessed a considerable amount of local business taxes by the City Government of Bagnet by virtue of Tax Ordinance No. 24. Despite her objections thereto, Doña Evelina paid the taxes. Nevertheless, unsatisfied with said Tax Ordinance, Doña Evelina, through her counsel Atty. ELP, filed a written claim for recovery of said local business taxes and contested the assessment. Her claim was denied, and so Atty. ELP elevated her case to the Regional Trial Court (RTC).
The RTC declared Tax Ordinance No. 24 null and void and without legal effect for having been enacted in violation of the public ation requirement of tax ordinances and revenue measures under the Local Government Code (LGC) and on the ground of double taxation. On appeal, the Court of Tax Appeals (CTA) affirmed the decision of the RTC. No motion for reconsideration was filed and the decision became final and executory. (4%)
(A) If you are Atty. ELP, what advice will you give Doña Evelina so that she can recover the subject local business taxes?
(B) If Doña Evelina eventually recovers the local business taxes, must the same be considered as income taxable by the national government?
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