GENERAL PRINCIPLES

I. a) 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 to tax? Explain.

b) May taxes be the subject of set-off or compensation? Explain.

X. 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%)

INCOME TAX

II. 1. Explain briefly whether the following items are taxable or non-taxable:

a. Income from jueteng;

b. Gain arising from expropriation of property;
c. Taxes paid and subsequently refunded;
d. Recovery of bad debts previously charged off;
e. Gain on the sale of a car used for personal purposes. (5%)

IV (1.) State with reasons the tax treatment of the following in the preparation of annual
income tax returns:
a) Proceeds of life insurance received by a child as irrevocable beneficiary;
b) 13th month pay and de minimis benefits;
c) Dividends received by a domestic corporation from
(i) another domestic corporation; and
(ii) a foreign corporation;
d) Interest on deposits with
(i) BPI Family Bank; and
(ii) a local offshore banking unit of a foreign bank;

e) Income realized from sale of

(i) capital assets; and
(ii) ordinary assets. (5%)

VII. 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%)
VIII. 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; and
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%)

XIII. 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%)

IX. 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%)

TRANSFER TAX

I. e) 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: The approval of the probate court is not a mandatory requirement in
the collection of estate taxes. Such taxes are exempt from the application of the statute of
non-claims, with such exemption justified by the necessity of government funding,
immortalized in the maxim that taxes are the lifeblood of the government. Marcos II v
CA, G.R No. 120880

XII. 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
(h) 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%)

VAT

III. (2) State and explain the basis of dutiable value of an imported article subject to an ad
valorem tax under the Tariff and Customs Code. b) Distinguish countervailing duty from
dumping duty. (5%)

III. (3.) Jacob, after serving a 5-year tour of duty as military attaché 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%)

XI. 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%)

NIRC REMEDIES

I. d) Is a deficiency tax assessment a bar to a claim for tax refund or tax credit? Explain.

II (2.) State and discuss briefly whether the following cases may be compromised or may not
be compromised:

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%)

IV (2) b) Does a withholding agent have the right to file an application for tax refund? Explain.
(5%)
VI. 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%)

TAX ADMINISTRATION AND ENFORCEMENT

IV (2) a) 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.

XIV (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%)

REAL PROPERTY TAX

III. (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 territorial jurisdiction 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%)

LOCAL TAX

I. c) 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.

XIV. (1.) 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%)

APPEALS

V. A taxpayer received a tax deficiency assessment of P1.2 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%)