2018 BAR EXAMINATION - TAXATION LAW

November 11, 2018/2:00P.M. to 6:00 P.M.

KM Corporation, doing business in the City of Kalookan, has been a distributor and retailer of
clothing and household materials. It has been paying the City of Kalookan local taxes based
on Sections 15 (Tax on Wholesalers, Distributors or Dealers) and 17 (Tax on Retailers) of the
Revenue Code of Kalookan City (Code). Subsequently, the Sangguniang Panglusod enacted
an ordinance amending the Code by inserting section 21 which imposes a tax on “Businesses
Subject to Excise, Value-Added and Percentage Taxes under the National Internal Revenue
Code (NIRC),” at the rate 50% of 1% per annum on the gross sales and receipts on persons “
who sell goods and services in the course of trade and business,” KM Corporation paid the
taxes due under Section 21 under protest, claiming that (a) local government units could not
impose a tax on businesses already taxes under the NIRC and (b) this would amount to double
taxation, since its business was already under Sections 15 and 17 of the Code.

1. May local government units impose tax on businesses already subjected to tax under
the NIRC? (2.5%)

YES. Under section 143 (H) of the Local Government Code of 1991, LGU may impose tax on
businesses even though already subjected to tax under the NIRC. The law only provides that
any business subject to the excise, value-added or percentage tax under the National Internal
Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales
or receipts of the preceding calendar year.
In the present case, businesses covered by the ordinance are subject to tax at the rate 50% of
1% per annum on the gross sales and receipts on persons. Hence, by virtue of the ordinance
imposing tax on “Businesses Subject to Excise, Value-Added and Percentage Taxes under the
National Internal Revenue Code (NIRC),” the LGU may impose tax on the covered subject
businesses.

2. Does this amount to double taxation? (2.5%)

Yes. There is double taxation in its broad sense (indirect duplicate taxation) if any of the
elements for direct duplicate taxation is absent. However, in this jurisdiction, indirect double
taxation is not prohibited. What is proscribed by the Constitution is the direct double taxation
which has the following elements:

(1) The same property must be taxed twice when it should be taxed once;
(2) Both taxes must be imposed on the same property or subject matter;
(3) For the same purpose;
(4) By the same State, Government, or taxing authority;
(5) Within the same territory, jurisdiction or taxing district;
(6) During the same taxing period; and
(7) Of the same kind or character of tax.

Here, not all of the enumerated elements are present, i.e., same taxing authority and same
character of tax. The national government imposes national tax while the local govt. unit
imposes local tax. Hence, though double taxation has resulted, it is the kind that our law allows.

II
2018 BAR EXAMINATION - TAXATION LAW
November 11, 2018/2:00P.M. to 6:00 P.M.

Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged on architectural design,

engineering, and construction work. Its principal office is located in Makati City, but it has
various infrastructure projects in the country and abroad. Thus , KKI employs both local and
foreign workers. The company adopted a policy that the employees’ salaries are paid in the
currency of the country where they are assigned or detailed.

Below are some of the employees of KKI. Determine whether the compensation they receive
from KKI in 2017 is taxable under Philippine laws and whether they are required to file tax returns
with the Bureau of Internal Revenue (BIR). (2% each)

1. Kris Konejero, a Filipino accountant in KKI’s Tax Department in the Makati office, and
married to a Filipino engineer also working on KKI;
2. Klaus Kloner, a German national who heads KKI Design Department in its Makati Office;
3. Krisanto Konde, a Filipino engineer in KKI’s Design Department who was hired to work at
the principal office last January 2017. In April 2017, he was assigned and detailed in the
company’s project in Jakarta, Indonesia, which project is expected to be completed in April
2019;
4. Kamilo Konde, Krisanto’s brother, also an engineer assigned to KKI’s project in Taipei,
Taiwan. Since KKI provides for housing and other basic needs, Kamilo requested that all his
salaries, paid in Taiwanese dollars, be paid to his wife in Manila in its Philippine Peso equivalent;
and
5. Karen Karenina. A Filipino architect in KKI’s Design Department who reported back to
KKI’s Makati Office in June 2017 after KKI’s project in Kuala Lumpur, Malaysia was completed

III
Kim, a Filipino national, worked with K-Square, Inc. (KSI), and was seconded to various KSI-
affiliated corporation:

1. From 1999 to 2004 as Vice President of K-Gold Inc.,

2. From 2004 to 2007 as Vice President of KPB Bank;
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November 11, 2018/2:00P.M. to 6:00 P.M.

3. From 2007 to 2011 as CEO of K-Com Inc.;

4. from 2011 to 2017 as CEO of K-Water Corporation, where Kim serves as CEO for seven
years until his retirement last December 2, 2017 upon reaching the compulsory retirement age
of 60 years.

All the corporations mentioned are majority-owned in common by the Koh family and covered
by a BIR-qualified multiemployer-employee retirement plan (MEERP), under which the
employees may be moved around within the controlled group (i.e., form one KSI subsidiary or
affiliate to another) without loss of seniority rights or break in the tenure. Kim was well-loved by
his employer and colleagues, so upon retirement, and on his last day in office, KSI gave him a
Mercedez Benz car worth Php5 million as a surprise, with a streamer that reads: “You’ll be
missed. Good Luck, Sir Kim.”

1. Are the retirement benefits paid to Kim pursuant to the MEERP taxable? (2.5%)

No. Under Section 32 (B) of the NIRC on Exclusions from Gross Income, the retirement benefits
received by officials and employees of private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan maintained by the employer shall be
exempt from all taxes and shall not be liable to attachment, garnishment, levy or seizure by or
under any legal or equitable process whatsoever except to pay a debt of the official or
employee concerned to the private benefit plan or that arising from liability imposed in a
criminal action: Provided, That the retiring official or employee has been in the service of the
same employer for at least ten (10) years and is not less than fifty years of age at the time of
his retirement

Here, Mr. Kim was able to meet the eligibilities required by law. He served more than 10 years
and retired upon reaching the compulsory retirement age of 60.

Hence, the retirements benefits received by Mr. Kim shall not be taxable.

2. Which internal revenue tax, if any, will apply to the grant of the car to Kim by the
company? (2.5%)

Donor’s Tax. The grant of the car was given to him out of the KSI’s generosity to Mr. Kim. Hence,
under the Tax Code, such gift will be subject to gift tax.

IV
Years ago, Krisanto brought a parcel of land in Muntinlupa for only Php 65,000. He donated
the land to his son, Kornelio, in 1980 when the property had a fair market value of Php 75,000,
and paid the corresponding donor’s tax.

Kornelio, in turn, sold the property in 2000 to Katrina for Php 6.5 million and paid the capital
gain tax, documentary stamp tax, local transfer tax, and other fees charges. Katrina, in turn,
donated the land to Klaret School last August 30, 2017 to be used as the site for additional
classrooms. No donor’s tax was paid because Katrina claimed that the donation was exempt
from taxation. At the time of the donation to Klaret School, the land had a fair market value
of Php 65 million.
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November 11, 2018/2:00P.M. to 6:00 P.M.

1. Is Katrina liable for donor’s tax? (2.5%)

Yes. The Tax Code provides that Gifts in favor of an educational and/or charitable, religious,
cultural or social welfare corporation, institution, accredited nongovernment organization,
trust or philanthropic organization or research institution or organization: Provided, however,
That not more than thirty percent (30%) of said gifts shall be used by such donee for
administration purposes. For the purpose of the exemption, a 'non-profit educational and/or
charitable corporation, institution, accredited nongovernment organization, trust or
philanthrophic organization and/or research institution or organization' is a school, college or
university and/or charitable corporation, accredited nongovernment organization, trust or
philanthrophic organization and/or research institution or organization, incorporated as a
nonstock entity, paying no dividends, governed by trustees who receive no compensation,
and devoting all its income, whether students' fees or gifts, donation, subsidies or other forms
of philanthrophy, to the accomplishment and promotion of the purposes enumerated in its
Articles of Incorporation.

Here, the facts failed to show that Klaret School is a nonstock, nonprofit school. Under the
principle of strictissimi Juris, a taxpayer who is claiming exemption must establish the factual
and documentary basis for its claim. Tax exemptions must be construed strictly against the
taxpayer.

Hence, Katrina is liable for donor’s tax.

2. How much in deduction from gross income may Katrina claim on account of the said
donation? (2.5%)
None. Since Katrina failed to prove for the satisfaction of the BIR that Klaret School is done
qualified nonstock, nonprofit institution, she will not be allowed to claim deduction from gross
income on account of the said donation.

V
Spouses Konstantino and Korina are Filipino citizen and are principal shareholders of a
restaurant chain, Korina’s Inc. The restaurant’s principal office is in Makati City, Philippines.
Korina’s became so popular as a Filipino restaurant that the owners decided to expand its
operations overseas. During the period 2010-2015 alone, it opened ten (10) stores throughout
North America and five (5) stores in various parts of Europe where there were large Filipino
communities. Each store abroad was in the name of a corporation organized under the laws
of the state or country in which the store was located. All stores had identical capital structures:
60% of the outstanding capital stock was owned by Korina’s Inc., while the remaining 40% was
owned directly by the spouses Konstantino and Korina.

Beginning 2017, in light immigration policy enunciated by US President Donald Trump, many
Filipinos have since returned to the Philippines and the number of Filipino immigrants in the US
dropped significantly. On account of these developments, Konstantino and Korina decided
to sell their shares of stock in the (5) US Corporations that were doing poorly in gross sales. The
spouses’ lawyer-friend advised them that they will be taxed 5% on the first Php100,000 net
capital gain, and 10% on the net capital gain in excess of Php 100,000
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November 11, 2018/2:00P.M. to 6:00 P.M.

Is the lawyer correct? If not, how should the spouses Konstantino and Korina be taxed on the
sale of their shares? (5%)

No. Under the section 24 (c) of the Tax Code, the final tax is imposed upon the net capital
gains realized during the taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation. Here, though the owners are resident taxpayers, the
corporations whose shares were sold are foreign corporations, being organized under the laws
of the state or country in which the store was located. If the shares sold are that of a foreign
corporation, it is not subjected to final income tax because one of the elements is not present,
not being a share of stock of a domestic corporation.

Here, the shares sold were of a foreign corporation registered under the laws of US. Hence,
they will not be subjected to Final Income Tax. However, the spouses shall be liable to pay
normal income tax for the proceeds of the sale of their shares.

VI
Kria, Inc., a Korean corporation engaged in the business of manufacturing electric vehicles,
established a branch office in the Philippines in 2010. The Philippine branch constructed a
manufacturing plant in Kabuyao, Laguna, and the construction lasted three (3) years.
Commercial operations in the Laguna plant began in 2014.

In just two (2) years of operation, the Philippine Branch had remittable profits in an amount
exceeding 175% of its capital. However, the head office in Korea instructed the branch not to
remit the profits to the Korean head office until instructed otherwise. The branch chief finance
officer is concerned that the BIR might hold the Philippine branch liable for the 10% improperly
accumulated earnings tax (IAET) for permitting its profits to accumulate beyond reasonable
business needs.

1. Is the Philippine branch of Kria subject to the 10% IAET under the circumstances stated
above? (2.5%)

No. Section 29 (B) (1) of the Tax Code provides that improperly accumulated earnings tax
imposed in the preceding Section shall apply to every corporation formed or availed for the
purpose of avoiding the income tax with respect to its shareholders or the shareholders of any
other corporation, by permitting earnings and profits to accumulate instead of being divided
or distributed. Further, the 10% IAET is imposed only to domestic corporations which are
classified as closely-held corporations.

Here, the branch office of Kria in the Philippines is a mere extension and treated as the same
juridical personality of its head office in Korea. Hence, the branch office cannot be the subject
of the 10% IAET.

2. Is it subject to 15% branch profit remittance tax (BPRT)? (2.5%)

Yes. Section 28 (A) of the Tax Code provides that “Any profit remitted by a branch to its head
office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied
2018 BAR EXAMINATION - TAXATION LAW
November 11, 2018/2:00P.M. to 6:00 P.M.

or earmarked for remittance without any deduction for the tax component thereof (except
those activities which are registered with the Philippine Economic Zone Authority).”

Here, since what is involve is the profit remittance of the Philippine branch to its head office in
Korea, the tax rate of 15% shall be imposed.

VII
Karissa is the registered owner of a beachfront property in Kawayan, Quezon which she
acquired in 2015. Unknown to many, Karissa was only holding the property in trust for a rich
politician who happened to be her lover. It was the politician who paid for the full purchase
price of the Kawayan property. No deed of trust or any other document showing that Karissa
was only holding the property in trust for the politician was executed him and Karissa.

Karissa died single on May 1, 2017 due to freak surfing accident. She left behind a number of
personal properties as well as real properties, including the Kawayan property. Karissa’s sister,
Karen, took charge of registering Karissa’ estate as a taxpayer and reporting, for income tax
and VAT purposes, the rental income received by the estate from real properties. However, it
was only on October 1, 2017 when Karen managed to file an estate tax return for her sister’s
estate. The following were claimed as deductions in the estate tax return.

1. Funeral Expenses amounting to Php 250,000

2. Medical expense amounting to Php 100,000 incurred when Karissa was hospitalized for
pneumonia a month before her death; and
3. Loss valued at Php6 million arising from the destruction of Karissa’s condominium unit
due to fire which occurred in September 15, 2017.

a. Should the beachfront property be included in Karissa’s gross estate? (2.5%)

Yes. Under the Tax Code, the value of the gross estate of the decedent shall be determined
by including the value at the time of his death of all property, real or personal, tangible or
intangible, wherever situated.

Here, Karissa, the decedent is the registered owner of the beachfront property. Regardless of
the circumstance surrounding the property, in the eyes of the law, the decedent is the
registered and legal owner of the property.

Hence, the beachfront property be included in Karissa’s gross estate.

b. Are the claimed deductions proper? (2.5%)

For 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 (P200,000). Here,
the funeral expenses (Php250,000.00) claimed exceeded the threshold amount. Hence, it is
not proper.

For Medical Expenses, it should be incurred by the decedent within one (1) year prior to his
death which shall be duly substantiated with receipts: Provided, That in no case shall the
deductible medical expenses exceed Five Hundred Thousand Pesos (P500,000). Here, the
medical expense amounting to Php100,000 was incurred when Karissa was hospitalized for
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pneumonia, which was not the cause of her death. Hence claim for medical expenses is not
proper.

For the claim of Loss valued at Php6 million arising from the destruction of Karissa’s
condominium unit due to fire which occurred in September 15, 2017 is proper because the loss
was incurred at the time the estate is being settled and was not use to compensate or as
deduction for income tax purposes.

VIII
Upon the death of their beloved parents in 2009, Karla, Karlo, and Karlie inherited a huge tract
of farm land in Kanlan City. The siblings had no plans to use the property. Thus, they decided
to donate the land but were not sure to whom the donation should be made. They consult
you, as well-known tax law expert, on the tax implications of the possible donations they plan
to make, by giving you a list of the possible donees:

1. The Kanlaon City High School Alumni Association (KCHS AA), since the siblings are all
alumni of the same school are active members of the organization. KCHS AA is an organization
intended to promote and strengthen ties between the school and its alumni;
2. The Kanlan City Water District which intends to use the Land for its office;or
3. Their second cousin on the maternal side, Kikay, who serves as the caretaker of the
property.

Advise the siblings which donation would expose them to the least tax liability. (5%)

I would advise the siblings to donate the tract of farm land to Kanlaon Water Districts.

Under Section 101(B)(1) Exemption of Certain Gifts, "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." Here, Kanlaon Water District is one of the
government agencies not conducted for profit as provided for by law.

As for the other two, both are not under the list of exempted institutions provided by law. Under
the law, donations to be made for the two will be considered as donations made to strangers
taxable at the rate of 30%, exposing the siblings to a much burdensome tax liability.

Hence, I would advise the siblings that the donation that would expose them to the least tax
liability is for the Kanlaon City Water District.

IX
Karlito, a Filipino businessman, is engaged in the business metal fabrication and repair of LPG
cylinder tanks. He conducts business under the name and style of “Karlito Enterpirses,” a single
proprietorship. Started only five (5) years ago, the business has grown so enormously that Karlito
decided to incorporate it by transferring all the assets of the business, particularly the inventory
of goods on hand, machineries and equipment, supplies, parts, raw materials, office furniture
and furnishings, delivery trucks and other vehicles, buildings, and tools to the new corporation,
Karlito’s Enterprises, Inc., in exchange for 100% of the capital stock of the new corporation, the
stock subscription to which shall be deemed fully paid in the form of the assets transferred to
the corporation by Karlito.
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As a result, Karlito’s Enterprises, the sole proprietorship, ceased to do business and applied for
cancellation of its BIR Certificate of Registration. The BIR, however, assessed Karlito VAT on
account of the cessation of business based in the current market price of the assets transferred
to Karlito’s Enterprises, Inc.

1. Is the transfer subject VAT? (2.5%)

Yes. Under section 106 (C) of the Tax Code, Changes in or Cessation of Status of a VAT-
registered Person. The tax imposed in Subsection (A) of this Section shall also apply to goods
disposed of or existing as of a certain date if under circumstances to be prescribed in rules and
regulations to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioner, the status of a person as a VAT-registered person changes or is terminated.
Hence, the transfer made by Karlito of all its assets to a new corporation is considered
transaction deemed sale which is subject to VAT.

Not subject to VAT. Under the Train law, such transfer will qualify as a tax-free exchange where
the title over the property is transferred to a controlled corporation.

2. Is the transfer subject to income tax? (2.5%)

No. Section 40 (C) of the Tax Code provides that No gain or loss shall also be recognized if
property is transferred to a corporation by a person in exchange for stock or unit of
participation in such a corporation of which as a result of such exchange said person, alone
or together with others, not exceeding four (4) persons, gains control of said corporation.

Here, Karlito decided to form a corporation by transferring all the assets of the business,
particularly the inventory of goods on hand, machineries and equipment, supplies, parts, raw
materials, office furniture and furnishings, delivery trucks and other vehicles, buildings, and tools
to the new corporation, Karlito’s Enterprises, Inc., in exchange for 100% of the capital stock of
the new corporation, the stock subscription to which shall be deemed fully paid in the form of
the assets transferred to the corporation by Karlito.

Hence, having no gain or loss to be recognized, said exchange shall not be subjected to
income tax.

X
Klaus, Inc., a domestic, VAT registered corporation engaged in the land transportation
business, owns a house and a lot along Katipunan St., Quezon City. This property is being used
by Klaus, Inc.’s president and single largest shareholder, Atty. Krimson, as his residence, No
business activity transpires there except for the company’s Christmas party which is held there
every December. Atty. Krimson recently grew tired of the long commute from Katipunan to his
office in Makati City and caused the company to sell the house and lot. The sale as recorded
in the book of Klaus, Inc. as investment in real property.

1. Is the sale of the said property subject VAT? (2.5%)

Yes. Incidental Transaction (pp 572)

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2. Is the sale subject to 6% capital gains tax or regular corporate income tax of 30%? (2.5%)

The sale is subject to 6% capital gains tax. Under the tax code, the term 'capital assets' means
property held by the taxpayer (whether or not connected with his trade or business), but does
not include 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 ordinary course of his trade
or business, or property used in the trade or business, of a character which is subject to the
allowance for depreciation provided in Subsection (F) of Section 34; or real property used in
trade or business of the taxpayer.

Here, the house is neither included in the inventory primarily held for sale nor property used in
the trade or business, of a character which is subject to the allowance for depreciation. The
facts showed that the property was recorded as an investment property, hence, not subject
to depreciation.

Hence, as capital asset, the house is subject to capital gains tax of 6%.

XI
Koko’s primary source of income is his employment with the government. He earns extra from
the land he inherited from his parents, and which land he has been leasing to a private, non-
stock, non-profit school since 2005.

Last January, the school offered to buy the land from Koko for an amount equivalent to its
zonal value plus 15% of such zonal value, Koko agreed but required the school to pay, in
addition to the purchase price, the 12% VAT. The school refused Koko’s proposal to pass on
the VAT contending that it was an entity exempt from such tax. Moreover, it said that Koko
was not regularly engaged in the real estate business and, therefore, was not subject to VAT.
Consequently, Koko should not charge any VAT to the school.

1. Is the contention of the school correct? (2.5%)

No. Under the Tax Code, sale

of real properties held primarily for sale to customers or held
for lease in the ordinary course of trade or business of the seller shall be subject to VAT.

Since Koko is engaged in leasing activities, the sale of the land subject of the lease shall be subject to
VAT if the threshold amount for VAT purposes is reached.

Here, Koko, even though he is not a VAT registered person or Koko was not regularly engaged
in the real estate business, he was regularly engaged in the business of leasing his land. Hence,
the school is not correct that the sale is not subject to VAT.

2. Will your answer be the same if Koko signed up as a VAT-registered person only in 2017?
(2.5%)

No. Koko, being a VAT-registered person can now charge the sale of the land with VAT since
he can now pass on the tax to buyer (school) regardless of the gross annual revenue.
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XII

The BIR Commissioner, in his relentless enforcement of the Run After Tax Evaders (RATE)
program, filed with the Department of Justice (DOJ) charges against a movie and television
celebrity. The Commissioner alleged that the celebrity earned around Php50 million in fees
from product endorsements in 2016 which she failed to report in her income tax and VAT
returns for said year. The celebrity questioned the proceeding before the DOJ on the ground
that she was denied due process since the BIR never issued any Premilinary Assessment Notice
(PAN) or a Final Assessment Notice (FAN), both of which are required under Section 228 of the
NIRC whenever the Commissioner finds that the proper taxes should be assessed.

Is the Celebrity’s contention tenable? (2.5%)

NO. Section 222.(a) provides that In the case of a false or fraudulent return with intent to evade
tax or of failure to file a return, the tax may be assessed, or a proceeding in court for the
collection of such tax may be filed without assessment, at any time within ten (10) years after
the discovery of the falsity, fraud or omission: Provided, That in a fraud assessment which has
become final and executory, the fact of fraud shall be judicially taken cognizance of in the
civil or criminal action for the collection thereof.

Here, the facts show that the celebrity was alleged to have failed to report her income tax on
her earnings of Php50 million. The alleged failure is one of the grounds to file a case in court for
tax collection even without the assessment as raised by the celebrity. Hence, the contention
is not tenable.

XIII
The Collector at the Port of Koronadal seized 100 second-hand right-hand drive buses
imported from Japan. He issued warrants of distraint and scheduled the vehicles for auction
sale. Kamilo, the importer of the second-hand buses, filed a replevin suit with the Regional Trial
Court (RTC). The RTC granted the replevin upon filing of a bond

Did the RTC err in granting the replevin? (2.5%)

Yes. Sec. 2301. Warrant for Detention of Property — Bond. — Upon making any seizure, the
Collector shall issue a warrant for the detention of the property; and if the owner or importer
desires to secure the release of the property for legitimate use, the Collector may surrender it
upon the filing of a sufficient bond, in an amount to be fixed by him, 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.
Here, the RTC was the one that granted the replevin. The law provides otherwise. It should be
the collector, if the owner of the seized property so desires to secure the release of the 100
buses, that should issue the replevin upon payment of the bond. The RTC acted without
jurisdiction. Hence, the RTC erred in granting the replevin.

XIV
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The City if Kabankalan issued a notice if assessment against KKK, Inc. for deficiency real
property taxes for the taxable years 2013 to 2017 in the amount of Php20 million. KKK paid the
taxes under protest and instituted a complaint entitled “Recovery of illegally and/or
Erroneously-Collected Local Business Tax, Prohibition with Prayer to Issue TRO and Writ
Preliminary Injunction” with the RTC of Negros Occidental.

The RTC denied the application for TRO. Its motion for reconsideration having been denied as
well, KKK filed petition for certiorari with the Court of Appeals (COA) assailing the denial of the
TRO.

Will the petition prosper? (5%)

No. Sec. 7 of RA 9282, the CTA has exclusive appellate jurisdiction on Decisions, orders or
resolutions of the Regional Trial Courts in local tax cases originally decided or resolved by them
in the exercise of their original or appellate jurisdiction. Further in the case of City of Manila v.
Grecia-Cuerdo, 715 SCRA 182 [2014], it is the CTA which has jurisdiction over a petition for
certiorari challenging an interlocutory order involving a local tax case being tried by RTC.

Here, KKK Inc, wrongly filed its petition for certiorari with the Court of Appeals. Hence, the
petition, having filed with the CA having no jurisdiction, will not prosper.

XV

In 2015, Kerwin bought a three-story house and lot in Kidapawan, North Cotabato. The
property has a floor area of 600 sq.m. and is located inside a gated subdivision. Kerwin initially
declared the property as residential for real property tax purposes.

In 2016, Kerwin started using the property in his business of manufacturing garments for export.
The entire ground floor is now occupied by state-of-the-art sewing machines and other
equipment, while the second floor is used as offices. The third floor is retained by Kerwin as his
family’s residence. Kerwin’s neighbors became suspicious of the activities going on inside the
house, and they decided to report it to the Kidapawan City Hall. Upon inspection, the local
government discovered that the property was being utilized for commercial use.

Immediately, the Kidapawan Assessor reclassified the property as commercial with an

assessment level of 50% effective January 2017, and assessed Kerwin back taxes and interest.
Kerwin claims that only 2/3 of the building was used as for commercial purposes since the third
floor remained as family residence. He argues that the property should have been classified
as party commercial and partly residential.

1. Is the Kidapawan assessor correct in assessing back taxes and interest? (2.5%)

Yes. Sec 222 of the LGC - Assessment of Property Subject to Back Taxes. - Real property
declared for the first time shall be assessed for taxes for the period during which it would have
been liable but in no case for more than ten (10) years prior to the date of initial assessment:
Provided, however, That such taxes shall be computed on the basis of the applicable schedule
of values in force during the corresponding period. If such taxes are paid on or before the end
of the quarter following the date the notice of assessment was received by the owner or his
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November 11, 2018/2:00P.M. to 6:00 P.M.

representative, no interest for delinquency shall be imposed thereon; otherwise, such taxes
shall be subject to an interest at the rate of two percent (2%) per month or a fraction thereof
from the date of the receipt of the assessment until such taxes are fully paid.

Kerwin started his business in 2016. The Assessor made an assessment for back taxes in 2017.
Hence, the assessment of back taxes and interest was made within the 10-year limit.

2. Is Kerwin correct that only 2/3 of the property should be considered commercial?
(2.5%).

YES. Under section 198 (B) of RA7610, Real property shall be classified for assessment purposes
on the basis of its actual use which refers to the purpose for which the property is principally or
predominantly utilized by the person in possession thereof.

Here, Kerwin is correct in raising that only 2/3 of the property should be considered commercial
pursuant section 198 (B).

3. If Kerwin wants to file an administrative protest against the assessment, is he required to

pay the assessment taxes first? With whom shall the protest be filed and within what period?
(2.5%)

YES. Section 252. Payment Under Protest. -

(a) No protest shall be entertained unless the taxpayer first pays the tax. There shall be
annotated on the tax receipts the words "paid under protest". The protest in writing must be
filed within thirty (30) days from payment of the tax to the provincial, city treasurer or municipal
treasurer, in the case of a municipality within Metropolitan Manila Area, who shall decide the
protest within sixty (60) days from receipt.

(b) The tax or a portion thereof paid under protest, shall be held in trust by the treasurer
concerned.

(c) In the event that the protest is finally decided in favor of the taxpayer, the amount or
portion of the tax protested shall be refunded to the protestant, or applied as tax credit against
his existing or future tax liability.

(d) In the event that the protest is denied or upon the lapse of the sixty day period prescribed
in subparagraph (a), the taxpayer may avail of the remedies as provided for in Chapter 3, Title
II, Book II of this Code.

XVI
In an action for ejectment filed by Kurt, the lessor-owner, against Kaka, the lessee, the trial
court ruled in favor of Kurt. However, the trial court first required Kurt to pay the realty taxes
due on the property for 2016 before he may recover possession thereof.

Kurt objected, arguing that the delinquent realty taxes were never raised as an issue in the
ejectment case. At any rate, Kurt claimed that it should be Kaka who should be made liable
for the realty taxes since it was Kaka who possessed the property throughout 2016.
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November 11, 2018/2:00P.M. to 6:00 P.M.

Is Kurt correct in resisting the trial court’s requirement to pay the taxes first? (2.5%)

NO. Section 268. Payment of Delinquent Taxes on Property Subject of Controversy. - In any
action involving the ownership or possession of, or succession to, real property, the court may,
motu propio or upon representation of the provincial, city, or municipal treasurer or his deputy,
award such ownership, possession, or succession to any party to the action upon payment to
the court of the taxes with interest due on the property and all other costs that may have
accrued, subject to the final outcome of the action.

XVII
Kilusang Krus, Inc. (KKI) is a non-stock, non-profit religious organization which owns a vast tract
of land in Kalinga.

KKI has devoted ½ of the land for various uses: a church with a cemetery exclusive for
deceased priests and nun, a school providing K to 12 education, and a hospital which admits
both paying and charity patients. The remaining ½ portion has remained idle.

The KKI Board of Trustees decided to lease the remaining ½ portion to a real estate developer
which constructed a community mall over the property.

Since the rental income from the lease of the property was substantial, the KKI decided to use
the amount to finance (1) the medical expenses of the charity patients in the KKI Hospital and
(2) the purchase of books and other educational materials for the students of KKI School.

1. Is KKI liable for real property taxes on the land? (2.5%)

Yes. Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the
exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is
a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY
used for charitable purposes. Exclusive is defined as possessed and enjoyed to the exclusion
of others; debarred from participation or enjoyment; and exclusively is defined, in a manner
to exclude; as enjoying a privilege exclusively.[40] If real property is used for one or more
commercial purposes, it is not exclusively used for the exempted purposes but is subject to
taxation.[41] The words dominant use or principal use cannot be substituted for the words used
exclusively without doing violence to the Constitutions and the law.[42] Solely is synonymous
with exclusively.[43]

What is meant by actual, direct and exclusive use of the property for charitable purposes is
the direct and immediate and actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use of the income from the real
property that is determinative of whether the property is used for tax-exempt purposes. (Lung
Center vs. Quezon City)

The settled rule in this jurisdiction is that laws granting exemption from tax are construed
strictissimi juris against the taxpayer and liberally in favor of the taxing power. Taxation is the
rule and exemption is the exception.
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November 11, 2018/2:00P.M. to 6:00 P.M.

Here, KKK Inc. failed to discharge its burden to prove that the entirety of its real property is
actually, directly and exclusively used for charitable purposes. While KKI has devoted ½ of the
land for various uses such as a church with a cemetery exclusive for deceased priests and nun,
a school providing K to 12 education, and a hospital which admits both paying and charity
patients, the remaining ½ portion to a real estate developer which constructed a community
mall over the property.

Hence, portions of the land leased to private entities as well as those parts of the hospital
leased to private individuals are not exempt from such taxes. On the other hand, the portions
of the land occupied by the hospital and portions of the hospital used for its patients, whether
paying or non-paying, are exempt from real property taxes.

2. Is KKI’s income from the rental fees subject to income tax? (2.5%)

No. In the case Lung Center vs. Quezon City, as a general principle, a charitable institution
does not lose its character as such and its exemption from taxes simply because it derives
income from paying patients, whether out-patient, or confined in the hospital, or receives
subsidies from the government, so long as the money received is devoted or used altogether
to the charitable object which it is intended to achieve; and no money inures to the private
benefit of the persons managing or operating the institution.

Here, the rental income from the lease of the property was substantial, the KKI decided to use
the amount to finance (1) the medical expenses of the charity patients in the KKI Hospital and
(2) the purchase of books and other educational materials for the students of KKI School. The
income derived from the lease were actually, directly and exclusively use for the activities of
KKKI. Hence, the rental income will not be subjected to income tax.

XVIII
Kathang Isip, Inc. (KII) is a domestic corporation engaged in the business of manufacturing,
importing, exporting, and distributing toys both locally and abroad. Its principal office is
located in Kalookan City, Philippines. It has 50 branches in different cities and municipalities in
the country. When KII applied for renewal of its mayor’s permit and licenses in its principal office
in January this year, Kalookan City demanded payment of the local business tax on the basis
of the gross sales reported by the corporation on its audited financial statements for the
preceding year. KII protested, contending that Kalookan City may tax only the sales
consummated by its principal office but not the sales consummated by its branch offices
located outside the Kalookan City.

When Kalookan City denied the protest, KII engaged the services of Atty. Kristeta Kabuyao to
file the necessary judicial proceedings to appeal the decision of Kalookan City. Atty. Kabuyao
is a legal expert, but resides in Kalibo, Aklan where her husband operates a resort. She,
however, practices in Metro Manila, including Kalookan City. The counsel representing the city,
in the case filed in Kalookan City by KII, questioned the use of Atty. Kabuyao’s Professional Tax
Receipt (PTR) issued in Aklan for a case filed in Kalookan City.

1. Is KII’s contention that Kalookan City can only collect local business taxes based on
sales consummated in the principal office meritorious? (2.5%)
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November 11, 2018/2:00P.M. to 6:00 P.M.

Yes. Section 150. Situs of the Tax.(a) For purposes of collection of the taxes under Section 143
of this Code, manufacturers, assemblers, repackers, brewers, distillers, rectifiers and
compounders of liquor, distilled spirits and wines, millers, producers, exporters, wholesalers,
distributors, dealers, contractors, banks and other financial institutions, and other businesses,
maintaining or operating branch or sales outlet elsewhere shall record the sale in the branch
or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be
paid to the municipality where such branch or sales outlet is located. In cases where there is
no such branch or sales outlet in the city or municipality where the sale or transaction is made,
the sale shall be duly recorded in the principal office and the taxes due shall accrue and shall
be paid to such city or municipality.

Here, KII has 50 branches in different cities and municipalities in the country. Applying the
provision of the law, KII should pay only for the tax on the sales consummated by its principal
office. The other outlets shall pay the tax to the municipality where such branch or sales outlet
is located.

Hence, KII contention is meritorious.

2. Is the Kalookan City counsel correct in saying that Atty. Kabuyao’s PTR issued in Aklan
cannot be used in Kalookan? (2.5%

No. Section 139. Professional Tax. (b) Every person legally authorized to practice his profession
shall pay the professional tax to the province where he practices his profession or where he
maintains his principal office in case he practices his profession in several places: Provided,
however, That such person who has paid the corresponding professional tax shall be entitled
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.

Here, Atty. Kabuyao practices in Metro Manila, including Kalookan City. Thus, while her PTR
was issued in Aklan, the allows her to practice law in different places provided that she paid,
as the facts showed, her professional tax in Aklan where she maintain her principal office.

Hence, the Kalookan City counsel is not correct in saying that Atty. Kabuyao’s PTR issued in
Aklan cannot be used in Kalookan.

XIX
The BIR assessed Kosco, Inc., an importer of food products, deficiency income and value-
added taxes, plus 50% surcharge after determining that Kosco, Inc. had under-declared its
sales by an amount exceeding 30% of that declared in its income tax and VAT returns. Kosco,
Inc. denied the alleged under-declaration, protested the deficiency assessment for income
and value-added taxes and challenged the imposition of the 50% surcharge on the ground
that the surcharge may only be imposed if Kosoc, Inc. fails to pay the deficiency taxes within
the time prescribed for their payment in the notice of assessment.

1. Is the imposition of the 50% surcharge proper? (2.5%)

YES. Section 248 (B) on Civil Penalties, in case of willful neglect to file the return within the period
prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is
2018 BAR EXAMINATION - TAXATION LAW
November 11, 2018/2:00P.M. to 6:00 P.M.

willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax or of the
deficiency tax, in case, any payment has been made on the basis of such return before the
discovery of the falsity or fraud: Provided, That a substantial underdeclaration of taxable sales,
receipts or income, or a substantial overstatement of deductions, as determined by the
Commissioner pursuant to the rules and regulations to be promulgated by the Secretary of
Finance, shall constitute prima facie evidence of a false or fraudulent return: Provided, further,
That failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of
that declared per return, and a claim of deductions in an amount exceeding (30%) of actual
deductions, shall render the taxpayer liable for substantial underdeclaration of sales, receipts
or income or for overstatement of deductions, as mentioned herein.

The contention of Kosko that the imposition of the 50% surcharge on the ground that the
surcharge may only be imposed if Kosoc, Inc. fails to pay the deficiency taxes within the time
prescribed for their payment is incorrect because the law provides for another alternative
basis, that is, in case a false or fraudulent return is willfully made. The BIR supported this by
determining that Kosco, Inc. had under-declared its sales by an amount exceeding 30% of
that declared in its income tax and VAT returns, a prima facie evidence of a false or fraudulent
return.

Hence, the imposition of 50% surcharge is proper.

2. If your answer to (a) is yes, may Kosco, Inc. enter into a compromise with the BIR for
reduction of the amount of surcharge to be paid (2.5%)

No. Section 204 (A) provides for the Authority of the Commissioner to Compromise, Abate and
Refund or Credit Taxes:

(A) Compromise the payment of any internal revenue tax, when:

(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.

Here, the case was due to willful neglect or failure or filing of Fraudulent return, which neither
of the two situations mentioned in section 204 (A) of the Tax Code.
Hence, Kosco, Inc. cannot enter into a compromise with the BIR for reduction of the amount
of surcharge to be paid

XX

Krisp Kleen, Inc. (KKI) is a corporation engaged in the manufacturing and processing of steel
and its by-products. It is both registered with the Board of Investments with a pioneer status,
and with the BIR as as VAT entity. On October 10, 2010, if filed a claim for refund/credit of Input
VAT for the period January 1 to March 31, 2009 before the Commissioner of Internal Revenue
(CIR). On February 1, 2011, as the CIR had not yet made any ruling on its claim for refund/credit,
KKI, fearful that its period to appeal to the courts might prescribed, filed an appeal with the
Court of Tax Appeals (CTA)
2018 BAR EXAMINATION - TAXATION LAW
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1. Can the CTA act on KKI’s appeal? (2.5%)

No. Under the Tax Code, the mandatory 120-day waiting period should be observed before
the filing a judicial claim within the 30-day from the expiration of the waiting period.

Here, KKI filed claim for refund/credit of Input VAT for the period January 1 to March 31, 2009
before the Commissioner of Internal Revenue on October 10, 2010. And on February 1, 2011 or
after 114 days, filed an appeal with the Court of Tax Appeals (CTA). The 120-day waiting period
was not observed before the appeal was filed with the CTA. In CIR vs. Aichi Forging Company
of Asia Inc, the court ruled that premature filing of for refund or credit of input VAT before the
CTA warrants dismissal inasmuch as no jurisdiction is acquired by the tax court. It is indisputable
that compliance with the 120-day waiting period is mandatory and jurisdictional.

Hence, CTA having no jurisdiction on the case, cannot act of KKI’s appeal.

2. Will your answer be the same if KKI filed its appeal on March 20, 2011 and CIR had not
yet acted on its claim? (2.5%)

Yes. Under the Tax Code, the mandatory 120-day waiting period should be observed before
the filing a judicial claim within the 30-day from the expiration of the waiting period.

Here, the filing of an appeal on March 20, 2011 or 161 days, made the cause of action of KKI
no longer actionable on the ground the period to file an appeal already prescribed. The
waiting period of 120 days lapsed on February 7, 2011. Ideally, KKI should have filed its appeal
on or before March 9 2011.

Hence, if KKI filed its appeal on March 20, 2011, the same will be dismissed by the CTA on the
ground of filing beyond the prescribed period.