TAX 1 MOCK BAR (2015)

1. X just hurdled the bar examinations and immediately engaged in the practice of law. In
preparing his income tax return, he listed the following as deductible items:
a. fees paid to the Supreme Court to be able to take the bar examinations;
b. fees paid to a bar review center to enroll in its pre-bar review classes;
c. malpractice insurance; and
d. amount spent to entertain a judge who decided his first case.
Which deductions are allowable? Reasons.

2. Gran Torino Co., a US business process outsourcing company, sent a team of language
trainers for 3 months to its local subsidiary, GT Philippines, Inc. which operates call center
operations in Cebu and Iloilo. The team trained the local staff to speak in English without their
distinct Cebuano and Ilonggo accents. After the training, Gran Torino subsequently issued its
bill. GT Philippines asks your advice on any Philippine tax consequences to the bill before it
remits its payment. What would you advice?

3. When Ato, a Filipino OFW based in Greece, went home for a vacation in Mindoro, he
sold his farm, which had a current market value of P1 million, to his friend, Peng, for only
P500,000 as a gesture of friendship even if many years ago, he bought the farm for P500,000
also. Ato is being assessed income tax on the sale by the BIR in the amount of P60,000. Ato
protested on two grounds:
a. he is an OFW exempt from taxes; and
b. he derived no gain from the sale. How would you decide on his protest?
Explain your answer.

4. X Corporation, a domestic corporation, is a wholly owned subsidiary of Y Corporation,

which is based in France. They entered into a Royalty Agreement that would allow X
Corporation to use in the Philippines certain property rights of Y Corporation in exchange for a
royalty fee.
a. Are the royalty fees payable by X Corporation to Y Corporation taxable in the
Philippines?
b. If no tax is paid on account of the above royalty fee payment, what are the
consequences insofar as X Corporation is concerned?

5. Your balikbayan cousin, who works as a nurse in Canada, came to visit you for 6 months
to do the following:
a. to sell her house in Manila and with the proceeds, purchase a farm lot in your province
where she plans to retire in 2010;
b. to check on her dollar remittances to her savings account with Banco de Oro which she
opened when she left the country more than 5 years ago.

Your cousin subsequently found a buyer for her house, the actress Angel Locsin, and they
immediately executed a deed of absolute sale duly notarized.

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A few weeks after, your cousin told you about the unfortunate confrontation she had with
Angel Locsin who demanded for the return of her money because the Register of Deeds refused
to transfer title to the house to her name unless proof of payment of taxes from the sale was
presented. Your cousin was also distraught to find out that her savings account was being
subjected to withholding tax. “Akala ko ba exempt from tax kaming mga OFW?”, she asked you.
What would be your reply?

6. For its fiscal year ending July 31, 2005, the Bamboo Corporation, which is engaged in the
manufacture of bamboo home accessories for export, and which is wholly family-owned,
registered handsome earnings that would exceed the company’s outstanding capital stock by
more than 200%. In spite of its good earnings position, the company had no immediate plans to
expand its factory because its capacity could still accommodate any increase in production and
exports for the next year three years. During its last regular board meeting, the company
president proposed the declaration of cash dividends in view of the healthy profits the
company had earned. However, the company treasurer argued against such move because the
rest of the family did not want to pay any taxes on their dividend income if there was to be a
distribution of profits. Both officers now turn to you as their corporate counsel for your
opinion. What would you tell them? Explain.

7. Chalap Food Corporation (CFC) incurred substantial advertising expenses in order to

protect its brand franchise for Chalap Ketchup, one of its main products. In its income tax
return, CFC included the advertising expenses as deduction from gross income, claiming it as an
ordinary business expense. Is CFC correct?

8. Ambo took out a life insurance policy with a face value of P 100,000 designating his wife
Bebang as the beneficiary. Under the terms of the policy, the insurer will pay Ambo the amount
of P100,000 after the 20th year of the policy, or if Ambo dies before the 20th year, the
P100,000 would be paid to Bebang.
a. Ambo outlived the policy and received P100,000. The premiums paid on the policy
amounted to P85,000. Is the P100,000 received by Ambo subject to income tax?
b. Assume that Ambo died during the 18th year of the policy and thus Bebang received
P100,000. Is this subject to income tax?

9. In January 2013, Abet opened a stock trading account with BPI Trade, a licensed
Philippine Stock Exchange stockbroker, and bought, through BPI Trade, 10,000 Bank of the
Philippine Islands (BPI) shares at P80 per share or a total of P800,000. BPI shares are listed and
traded at the Philippine Stock Exchange (PSE). In February 2015, the price of BPI shares at the
PSE had risen to P100 per share.
a. Abet sold the 10,000 BPI shares at the PSE and received P1,000,000. Is Abet subject to
income tax on the sale of his BPI shares? Is he liable for any other tax and if so for how
much?
b. What if instead of selling the 10,000 BPI shares at the PSE, Abet sold them directly to his
friend Binny and received P1,000,000. Is Abet subject to income tax on the sale? If so for
how much?

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10. Mr. Mariano, who inherited a well-preserved ancestral house in Pila, Laguna, accepted
the offer of Sister Imaculada, Head of the Congregation of Blue Nuns for the latter to rent the
house as temporary refuge for destitute unwed mothers. Mr. Mariano religiously received
rental payments from the congregation as the house and the congregation’s mission caught the
attention and response from generous philanthropists all over the world. Mr. Mariano felt
blessed for having agreed to have such use for the house until one day, he was dismayed to
receive a notice from the BIR Laguna Regional District Office (RDO) that he was deficient in his
payment of taxes. He immediately consulted with his friend, Atty. Braguda who advised him not
to worry about the assessment because the source of his rental income was property used for
religious purposes which the Constitution exempted from taxation. Unsure of the advice, he
obtained a second opinion from another friend, Atty. Bulalo who told him that he should have
donated the property to the religious order as that was what the Constitution exempts to avoid
being taxed. Totally confused, Mr. Mariano decides to get your opinion about the two lawyers’
opinions. What would you say?

TAX 1 MOCK BAR (2014)

1. Bayani, single, owns a low-cost house and lot in Manila where he is presently residing.
He also owns a high-end residential condo unit in Makati. He intends to start up a business in
the near future. For this purpose, he will need substantial amount of capitalization which he
will be able to obtain by selling the condo unit at a profit. In order to avoid, if not minimize
income tax liabilities, Bayani thought of first transferring his principal residence to the condo
unit, later sell the same and then apply for exemption from the CGT.
a. Does Bayani have a foolproof plan in order to avoid or minimize payment of income tax
in the event that he sells the condo unit?
b. Is there tax avoidance or tax evasion?

2. Since 2010, Attys. Manalo and Matalo had been partners of Manalo Matalo Law Offices,
a GPP. Every year-end, Attys. Manalo and Matalo would share and distribute among themselves
the net profits of the partnership. Last year, however, the partners did not actually distribute
their distributive shares from the partnership profits. This year, the partners do not expect any
profit at year’s end due to heavy expenses incurred by the law office.
a. May the partners or the partnership be held liable for IAET? If so, when may this be
imposed?
b. Are they, or is the partnership, liable for MCIT? Explain why or why not.

3. By a sworn affidavit, Makisig informed the Commissioner that a certain taxpayer had
failed to withhold and remit taxes to the government. After an investigation, the Commissioner
determined that no deficiency tax was due from the taxpayer. Makisig instituted before the RTC
an action for mandamus to compel the Commissioner to assess and collect from the taxpayer
deficiency income taxes.
a. Is a reward paid by the BIR to the informant after a successful collection of taxes
considered a taxable income? If so, is it required to be reported in the annual income
tax return?
b. If you were the judge, will you grant the application?

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4. Pursuant to the Revenue Code of Mandaluyong, the City Treasurer assessed California
Gardens Condominium Corporation (CGCC), organized as a non-stock and non-profit entity, for
business taxes on the receipts of association dues and parking fees. The association dues are
used for the maintenance and upkeep of the common areas whereas the parking fees are
regularly collected from pay parking spaces used by visitors and unit owners who do not own
parking slots. CGCC objected to the assessment for lack of factual and legal basis. Decide.

5. Atty. Sanidad, a retired judge and a practicing lawyer, rendered a legal advice to a client
abroad for which he charged the latter fees to be paid thru inward bank remittance in US Dollar
currency. He collected $1,000.00 for the services. A friend in the BIR advised Atty. Sanidad that
even though his receipts are taxed in the US, the same would still be subject to income tax (and
VAT) in the Philippines. Atty. Sanidad countered that it could not be so for otherwise there
would be a double taxation. Whose opinion is legally correct?

6. Atty. Tapdasan, an international boxing judge and referee, and a professor of law,
recently sold at a loss his principal residence in Makati. He seeks confirmation from you
regarding the preparation of his Annual ITR. He is of the opinion that there is no income tax due
from the sale of the property and that the loss he incurred from the sale is deductible from his
income. He is not certain, however, from which income he may utilize the loss as a deduction –
from his professional income as a lawyer, boxing judge and referee, pay from teaching law, or
from his entire gross income.
a. What will be your answer to his query regarding the deduction of the loss?
b. Should the entire income of Atty. Tapdasan from rendering services as an international
boxing judge and referee should be reported in his Annual ITR?

Multiple Choice Questions

1. Pedro is a free-lance artist with a small sari-sari store in Manila. In March this year,
Pedro went to California, USA to attend the funeral of his spinster aunt. In the preparation of
his Annual ITR, is Pedro required to declare as gross income the profits realized from the small
sari-sari store business while he was away (outside of the Philippines)?
a. No, because the profits are considered coming from outside the Philippines. While away
from home, Pedro is considered a nonresident of the Philippines. A nonresident is
taxable only on his incomes derived from sources within the Philippines.
b. No, because there is no showing that the business of Pedro is registered with the BIR.
c. No, because Pedro could not have benefitted from the profits while outside the Phils.
d. Yes, because business profits are part of gross income subject to tax.

2. Filipinas Semiconductors Inc. is a domestic corporation engaged in the business of

manufacturing semiconductor devices. It sells its products locally and abroad. What is the
correct tax treatment on the income derived from sales abroad?
a. It is considered entirely coming from sources abroad.
b. It is considered partly coming from source outside and partly within the Phils.
c. It is not entirely taxable in the Philippines.
d. It is fully exempted from taxation in the Philippines.

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3. Mallari has a business establishment in Makati. Her sister, a resident of Japan, borrowed
money from her which she cannot anymore collect because the latter became insolvent. Can
Mallari consider the debt as a charitable contribution which is recognized as a deduction
against income?
a. No, because the debt was incurred between members of the family.
b. No, because situs belongs to Japan where the borrower is a resident.
c. Yes, so long as Mallari charges the amount as a bad debt expense.
d. Yes. The amount may qualify as a charitable contribution which is recognized as a
deduction against income.

4. Early last year, Norberto purchased a vacant parcel of land for only P900,000.00. Due to
the construction of a luxury hotel and resort nearby, the FMV of all properties, including his
own, within the proximity of the hotel went up. When Norberto had his property reappraised,
its value at the end of the year stood at P1.9 million. Norberto sold the property at its current
market value. In the preparation of his annual ITR to be filed this coming April 15, should he
include the amount of P1 million as part of his gross income?
a. Yes, because gain is presumed to have been realized from a dealing in capital asset.
b. Yes, because the amount is income realized or received out of a closed and completed
transaction.
c. No, it is not merely the difference of P1 million which is considered income but the
entire value of the property at P1.9 million. However, an Annual ITR need not report this
amount anymore because of FWT.
d. No, because such amount of P1 million is not gain which is reportable in the Annual ITR
but in a CGT Return.

5. During the taxable year, a nonresident alien not engaged in trade or business (NRANE)
in the Philippines earned several incomes from sources within and without the Philippines.
Which of the following statements does not state a sound legal principle?
a. He is subject to tax on gross income derived from sources within the Phils only.
b. He is not allowed to claim personal exemption.
c. All of his income shall be subject to a FWT of 25%.
d. The progressive rates of 5%-32% for income tax is not applicable.

6. The distributive share of a member of this business organization shall be declared in the
individual Annual ITR. This business organization refers to –
a. A duly registered general partnership
b. An unregistered general partnership
c. A general professional partnership
d. A joint venture

TAX 1 MOCK BAR (2013)

1. Juan Pablo worked as an auditor of SGV & Associates, a GPP of accountants based in
Makati, from 2005 to 2011. While in the employ of SGV, Juan Pablo maintained a Peso savings

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account with BPI, a local bank. Thus, in 2011, his entire income consisted of salaries and
allowances from SGV plus the interest earnings from his deposit account.

Starting January 2012, Juan Pablo moved to Nevada, USA to work in Earnst & Young, a top
accounting firm, where he receives a substantially larger amount of salary and other benefits
such as housing and transportation allowances. He regularly deposits a portion of his receipts
under a dollar deposit account in a bank in Nevada where he is now based. Meanwhile, he
leased his residential house to a cousin for a minimal amount of rent. It was agreed that the
rent shall be deposited every month in the BPI account of Juan Pablo. The State of Nevada does
not impose tax on incomes.
a. What determines the source of the interests earned from bank deposit account?
b. Beginning January 2012, are the interest earnings of Juan Pablo from his BPI Peso
account taxable?
c. Is the rent paid by Juan Pablo’s cousin taxable?
d. May the housing and transportation allowances received by Juan Pablo in 2012 be
considered as compensation incomes subject to Philippine tax?
e. Are the interest earnings from the dollar deposit account in the Nevada bank subject to
Philippine final tax? If in the affirmative, at what rate is the tax?

2. “Flores and Macapagal” is a partnership of lawyers with its principal office in Manila.
Sometime in August 2008, Narcissa Dela Cruz retained the services of the law firm to represent
her in two civil cases. She agreed to pay the law firm a contingent fee equivalent to one-half of
whatever amounts and/or properties she might recover after the termination of the said suits.
It appears that the parties to said cases eventually entered into a compromise agreement, on
the basis of which the court rendered a decision declaring Narcissa Dela Cruz the owner of ten
(10) parcels of land assigned to her under the compromise agreement. Accordingly, the court
ordered that:
“As prayed for in the motion of the attorneys for the plaintiff in these two cases, the
court hereby orders that a statement of their lien be entered upon the record of said
cases thereby subjecting any judgment or decree in favor of their client to the payment
of said lien, consisting in ½ of whatever amount or property she may obtain from the
defendants or any of them by reason of the complaint filed in the above-entitled case.”

Pursuant to the above order, after the same had become final and executory, Narcissa Dela
Cruz surrendered to the RD of Manila the Torrens titles covering the lands adjudicated to her,
for annotation and registration of aforesaid attorney’s lien.
a. For purposes of income tax, is a GPP a taxable entity? If in the affirmative, how is the
income of a GPP taxed? If in the negative, does it mean that the partnership profit is
totally exempt from income tax?
b. By receiving one half of the parcels of land adjudicated to Narcissa Dela Cruz, did the
partnership realize an income?
c. In case the partners sell the parcels of land transferred to them, would the partnership
be liable to income tax?

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3. Pro Friends Property, Inc., a realty developer, offered one of its low-cost house and lot
for sale in exchange for a prime condominium unit which Mr. Santa Cruz owns and uses as
principal residence.
a. On the part of Mr. Santa Cruz, is he liable for income tax?
b. On the assumption that the exchange is taxable, can Mr. Santa Cruz avoid payment of
the tax?

4. Maharlika Inc., engaged in real estate business, registered with the BIR in 2000. Due to
heavy losses and increased expenses last year (2012), Maharlika posted a net taxable income of
only P300,000.00 although its gross income reached P10 million. This is significantly better
compared to the company’s financial position a year earlier (2011) when it reported a negative
net income, a performance which forced the company to pay MCIT in the amount of
P500,000.00. This year (2013), Maharlika expects its overall business to grow as it tries to
gradually move towards a more stable position. With substantially higher amount of net
income expected this year, Maharlika anticipates that the MCIT will be avoided this year.
a. During the taxable year 2012, is Maharlika liable to pay normal income tax?
b. Based on facts above, may there be allowed to be credited against normal income tax
for the current taxable year (2013) an amount paid as taxes in the previous year (2012)?

5. In March 2009, Tonette, who is fond of jewelries, bought a diamond ring for
P750,000.00, a bracelet for P250,000.00, a necklace for P500,000.00, and a brooch for
P500,000.00. Tonette derives income from the exercise of her profession as a licensed CPA. In
October 2009, Tonette sold her diamond ring, bracelet, and necklace for only P1.25 million
incurring a loss of P250,000.00. She used the P1.25 million to buy a solo diamond ring in
November 2009 which she sold for P1.5 million in September 2010. Tonette had no other
transaction in jewelry in 2010.
a. What is meant by “short-term” holding period?
b. Is there a preferential tax treatment given to gains, whether capital or ordinary, from
dealings in property?
c. In the given case, was there a gain or loss, capital or ordinary, short-term or long term?
Specify.
d. What is meant by the “loss limitation rule”?
e. For purposes of income tax, is Tonette better off postponing the sale of her solo
diamond ring to a later date rather than in September 2010?
f. Suppose that instead of the jewelries, Tonette sold in 2009 a vacant land which she
owns. May she deduct the loss incurred in 2009 from her income in 2010?

6. Maria, who is engaged in real estate business, sold her own principal residence for only
P1.5 million although its present zonal value is P2.5 million. She acquired the property a few
years ago for only P1 million.
a. Is there a gain realized from the transaction?
b. Is Maria liable for donor’s tax on the difference between the zonal value and the gross
selling price?

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7. Manny Pakyaw, a professional boxer and a congressman, recently sold at a loss a vacant
parcel of land located in GenSan City. He seeks confirmation from you regarding the
preparation of his Annual ITR. Manny Pakyaw is of the opinion that there is no income tax due
from the sale of the property and that the loss he incurred from the sale is deductible from his
income. He is not certain, however, from which income he may utilize the loss as a deduction –
from his professional income as a boxer, from salaries and allowances as Congressman, or from
his entire gross income. Manny Pakyaw is also of the opinion that his earnings from boxing
competitions abroad are not anymore required to be declared since income taxes due thereon
in foreign countries have already been paid. What will be your answer?

8. ABC Corporation is a domestic corporation engaged in manufacturing business. It

started its business operations in 2005. In 2012, ABC Corporation had the following
information:
Gross sales: P2,000,000.00
Cost of goods sold: P1,500,000.00
Other operating expenses: P600,000.00

What is the income tax payable by ABC Corporation for the taxable year 2012?

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