bAR QUESTION TAXATION - 2005

[pinkalou]

BAR EXAMINATIONS 2005 TAXATION



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

- 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%)

(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%)
- 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%)
(2.) a) 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%)

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


- 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%)
- 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%)


- 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%)

- 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%)

- 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%)
TAXATION Page 7 of 8

- 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%)

- 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 (g) proceeds from a life insurance policy issued by a U.S. corporation.
Which of the foregoing assets shall be included in the taxable gross estate in the Philippines? Explain.
(5%)

- 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%)


- 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%)
(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%)


NOTHING FOLLOWS

[pinkalou]

BAR EXAMINATION 2006
TAXATION LAW

10 September 2006 2 P.M. - 5 P.M.
INSTRUCTIONS

This questionnaire consists of fourteen (14) numbers contained in eight (8) pages. Read each question very carefully. Answer legibly, clearly, and concisely. Start each number on a separate page; an answer to a sub-question under the same number may be written continuously on the same page and immediately succeeding pages until completed. Do not repeat the question. A mere "Yes" or "No" answer without any corresponding discussion will not be given any credit.

HAND IN YOUR NOTEBOOK WITH THIS QUESTIONNAIRE

GOOD LUCK!!!


Signed ANGELINA S. GUTIERREZ
Chairperson
20006 Bar Examination Committee
PLEASE CHECK THE NUMBER OF PAGES IN THIS SET
WARNING: NOT FOR SALE OR UNAUTHORIZED USE

TAXATION LAW

- I -

Enumerate the 3 stages or aspects of taxation. Explain each. 5%

Distinguish "direct taxes" from "Indirect taxes". Give examples. 5%

- II -

What is tax pyramiding? What is its basis in law? 5%

- III -

What properties are exempt from the real property tax? 5%

- IV -

Royal Mining is a VAT -registered domestic mining entity. One of its products is silver being sold to the Bangko Sentral ng Pilipinas. It filed a claim with the BIR for tax refund on the ground that under Section 106 of the Tax Code, sales of precious metals to the Bangko Sentral are considered export sales subject to zero-rated VAT.

Is Royal Mining's claim meritorious? Explain. 5%

- V -

Vanishing deduction is availed of by taxpayers to:

correct his accounting records to reflect the actual deductions mad

reduce his gross income

reduce his output value-added tax liability

reduce his gross estate

Choose the correct answer. Explain. 5%

The Constitution provides "charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, and non- profit cemeteries and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation." This provision exempts charitable institutions and religious institutions from what kind of taxes? Choose the best answer. Explain. 5%

from all kinds of taxes, i.e., income, VAT, customs duties, local taxes and real property tax

from income tax only

from value-added tax only

from real property tax only

from capital gains tax only

- VI -

Congress enacts a law granting grade school and high school students a 10% discount on all school-prescribed textbooks purchased from any bookstore. The law allows bookstores to claim in full the discount as a tax credit.

If in a taxable year a bookstore has no tax due on which to apply the tax credits, can the bookstore claim from the BIR a tax refund in lieu of tax credit? Explain. 2.5%

Can the BIR require the bookstores to deduct the amount of the discount from their gross income? Explain. 2.5%

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

- VII -

Congress enacts a law imposing a 5% tax on the gross receipts of common carriers. The law does not define the term "gross receipts". Express Transport, Inc., a bus company plying the Manila- Baguio route, has time deposits with ABC Bank. In 2005, Express Transport earned P1 Million interest, after deducting the 20% final withholding tax from its time deposits with the bank. The BIR wants to collect a 5% gross receipts tax on the interest income of Express Transport without deducting the 20% final withholding tax. Is the BIR correct? Explain. 5%

- VIII -

On June 1, 2003, Global Bank received a final notice of assessment from the BIR for deficiency documentary stamp tax in the amount of P5 Million. On June 30, 2003, Global Bank filed a request for reconsideration with the Commissioner of Internal Revenue. The Commissioner denied the request for reconsideration only on May 30, 2006, at the same time serving on Global Bank a warrant of distraint to collect the deficiency tax. If you were its counsel, what will be your advice to the bank? Explain. 5%

- IX -

The Commissioner of Internal Revenue issued an assessment for deficiency income tax for taxable year 2000 last July 31, 2006 in the amount of P10 Million inclusive of surcharge and interests. If the delinquent taxpayer is your client, what steps will you take? What is your defense? 10%

- X -

The Collector of Customs issued an assessment for unpaid customs duties and taxes on the importation of your client in the amount of P980,000.00. Where will you file your case to protect your client's right? Choose the correct courts/agencies, observing their proper hierarchy. 5%

Court of Tax Appeals

Collector of Customs

Commissioner of Customs

Regional Trial Court

Metropolitan Trial Court

Court of Appeals

Supreme Court

- XI -

Charlie, a widower, has two sons by his previous marriage. Charlie lives with Jane who is legally married to Mario. They have a child named Jill. The children are all minors and not gainfully employed.

How much personal exemption can Charlie claim? Explain. 2.5%

How much additional exemption can Charlie claim? Explain. 2.5%

- XII -

Mr. Abraham Eugenio, a pawnshop operator, after having been required by the Revenue District Officer to pay value added tax pursuant to a Revenue Memorandum Order (RMO) of the Commission.er of Internal Revenue, filed with the Regional Trial Court an action questioning the validity of the RMO.

If you were the judge, will you dismiss the case? 5%

- XIII -

Gerry was being prosecuted by the BIR for failure to pay his income tax liability for Calendar Year 1999 despite several demands by the BIR in 2002. The Information was filed with the RTC only last June 2006. Gerry filed a motion to quash the Information on the ground of prescription, the Information having beer. filed beyond the 5-year reglementary period.

If you were the judge, will you dismiss the Information? Why? 5%

- XIV -

Gold and Silver Corporation gave extra 14th month bonus to all its officials and employees in the total amount of P75 Million. When it filed its corporate income tax return the following year, the corporation declared a net operating loss. When the income tax return of the corporation was reviewed by the BIR the following year, it disallowed as item of deduction the P75 Million bonus the corporation gave its officials and employees on the ground of unreasonableness. The corporation claimed that the bonus is an ordinary and necessary expense that should be allowed.

If you were the BIR Commissioner, how will you resolve the issue? 5%

- XV -

Lily's Fashion, Inc. is a garment manufacturer located and registered as a Subic Bay Freeport Enterprise under Republic Act No. 7227 and a non-VAT taxpayer. As such, it is exempt from payment of all local and national internal revenue taxes. During its operations, it purchased various supplies and materials necessary in the conduct of its manufacturing business. The suppliers of these goods shifted to Lily's Fashion, Inc. the 10% VAT on the purchased items amounting to PS00,000.00. Lily's Fashion, Inc. filed with the BIR a claim for refund for 'the input tax shifted to it by the suppliers.

If you were the Commissioner of Internal Revenue, will you allow the refund? 5%

- XVI -

Quezon City published on January 30, 2006 a list of delinquent real property taxpayers in 2 newspapers of general circulation and posted this in the main lobby of the City Hall. The notice requires all owners of real properties in the list to pay the real property tax due within 30 days from the date of publication, otherwise the properties listed shall be sold at public auction.

Joachin is one of those named in the list. He purchased a real property in 1996 but failed to register the document of sale with the Register of Deeds and secure a new real property tax declaration in his name. He alleged that the auction sale of his property is void for lack of due process considering that the City Treasurer did not send him personal notice. For his part, the City Treasurer maintains that the publication and posting of notice are sufficient compliance with the requirements of the law.

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

Assuming Joachin is a registered owner, will your answer be the same? 2.5%

NOTHING FOLLOWS.

[pinkalou]

QUESTIONS AND ANSWERS
TAXATION LAW BAR EXAMINATION 2000


I

Justice Holmes once said: “The power to tax is not the power to destroy while this Court (the Supreme Court) sits”. Describe the power to tax and it’s limitations. (5%)

SUGGESTED ANSWER:

The power to tax is an inherent power of the sovereign which is exercised through the legislature, to impose burdens upon subjects and objects within it’s jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government. The underlying basis for it’s exercise is governmental necessity for without it no government can exist or endure. Accordingly, it has the broadest scope of all the powers of government because in the absence of limitations, it is considered as unlimited, plenary, comprehensive and supreme. The two limitations on the power of taxation are the inherent and constitutional limitations which are intended to prevent abuse on the exercise of the otherwise plenary and unlimited power. It is the Court’s role to see to it that the exercise of the power does not transgress these limitations.


II

a. Mr. Pascual’s income from leasing his property reaches the maximum rate of tax under the law. He donated one-half of his said property to a non-stock, non-profit educational institution whose income and assets are actually, directly and exclusively used for educational purposes, and therefore qualified for tax exemption under Article XIV, Section 4 (3) of the Constitution and Section 30 (h) of the Tax Code. Having thus transferred a portion of his said asset, Mr. Pascual succeeded in paying a lesser tax on the rental income derived from his property. Is there tax avoidance or tax evasion? Explain. (2%)

SUGGESTED ANSWER:

There is tax avoidance. Mr. Pascual has exploited a legally permissive alternative method to reduce his income tax by transferring part of his rental income to a tax exempt entity through a donation of one-half of the income producing property. The donation is likewise exempt from the donor’s tax. The donation is the legal means employed to transfer the incidence of income tax on the rental income.

b. An Executive Order was issued pursuant to law granting tax and duty incentives only to businesses and residents within the “secured area” of the Subic Economic Special Zone, and denying said incentives to those who live within the Zone but outside such “secured area”. Is the constitution right to equal protection of the law violated by the Executive Order? Explain. (3%)

SUGGESTED ANSWER:

No. Equal protection of the law clause is subject to reasonable classification. Classification, to be valid, must (1) rest on substantial distinctions, (2) be germane to the purpose of the law, (3) not be limited to existing conditions only, (4) apply equally to all members of the same class.
There are substantial differences between big investors being enticed to the “secured area” and the business operators outside that are in accord with the equal protection clause that does not require territorial uniformity of laws. The classification applies equally to all the resident individuals and businesses within the “secured area”. The residents, being in like circumstances to contributing directly to the achievement of the end purpose of the law, are not categorized further. Instead, they are similarly treated, both in privileges granted and obligations required. (Tiu, et al., v. Court of Appeals, et al., G.R. No. 127410, January 20, 1999)


III

Article VI, Section 28 (3) of the 1987 Philippine Constitution provides that charitable institutions, churches, and personages or convents appurtenant thereto, mosques, non-profit cemeteries and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes shall be exempt from taxation.

a) To what kind of tax does this exemption apply? (2%)

SUGGESTED ANSWER:

This exception applies only to property taxes. What is exempted is not the institution itself but the lands, buildings and improvements actually, directly and exclusively used for religious, charitable and educational purposes. (Commissioner of Internal Revenue v. Court of Appeals, et al., G.R. No. 124043, October 14, 1998).


b) Is proof of actual use necessary for tax exemption purposes under the Constitution? (3%)

SUGGESTED ANSWER:

Yes, because tax exemptions are strictly construed against the taxpayer. There must be evidence to show that the taxpayer has complied with the requirements for exemption. Furthermore, real property taxation is based on use and not on ownership; hence the same rule must also be applied for real property tax exemptions.

IV

Among the taxes imposed by the Bureau of Internal Revenue are income tax, estate and donor’s tax, value-added tax, excise tax, other percentage taxes, and documentary stamp tax. Classify these taxes into direct and indirect taxes and differentiate direct from indirect taxes. (5%)

SUGGESTED ANSWER:

Income tax, estate and donor’s tax are considered as direct taxes. On the other hand, value-added tax, excise tax, other percentage taxes, and documentary stamp tax are indirect taxes.

Direct taxes are demanded from the very person who, as intended, should pay the tax which he cannot shift to another; while and indirect tax is demanded in the first instance from one person with the expectation that he can shift the burden to someone else, not as tax but as a part of the purchase price.


V

A domestic corporation failed to withhold and remit the tax on income received from Philippine sources by a non-resident foreign corporation. In addition to the civil penalties provided for under the Tax Code, a compromise penalty was imposed for violation of the withholding tax provisions. May the Commissioner of Internal Revenue legally enforce the collection of compromise penalty? (5%)


SUGGESTED ANSWER:

No. There is no showing that the compromise penalty was imposed by the Commissioner of Internal Revenue with the agreement and conformity of the taxpayer. (Wonder Mechanical Engineering Corporation v. Court of Tax Appeals, et al., 64 SCRA 555).

VI

To start a business of his own, Mr. Mario de Guzman opted for an early retirement from a private company after ten (10) years of service. Pursuant to the company’s qualified and approved private retirement benefit plan, he was paid his retirement benefit, which was subjected to withholding tax.

Is the employer correct in withholding tax? Explain. (2%)

Under what conditions are retirement benefits received by officials and employees of private firms excluded from gross income and exempt from taxation? (3%)


SUGGESTED ANSWER:

(a) It depends. An employee retiring under a company’s qualified and private retirement plan can only be exempt from income tax on his retirement benefits if the following requisites are met: (1) that the retiring employee must have been in service of the same employer for the last ten (10) years; (2) that he is not less than 50 years of age at the time of retirement; and (3) the benefit is availed of only once.

In the instant case, there is no mention whether the employee has likewise complied with requisites number (2) and (3).

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

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

a. The retiring official or employee must have been in service of the same employer for at least ten (10) years;

b. That he is not less than fifty (50) years of age at the time of retirement; and

c. that the benefit is availed of only once.

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

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

b. In the absence of retirement plan or agreement providing for retirement benefits the benefits are excluded from gross income and exempt from income tax if:

i. Retiring employee must have served at least five (5) years; and

ii. That he is not less than sixty (60) years of age but not more than sixty five (65).

VII

Mr. Javier is a non-resident senior citizen. He receives a monthly pension from the GSIS, which he deposits with the PNB-Makati Branch. Is he exempt from income tax and therefore not required to file an income tax return? (5%)

SUGGESTED ANSWER:

Mr. Javier is exempt from income tax on his monthly GSIS pension (Sec. 32(B)(6)(f), NIRC of 1997) but not on the interest income that might accrue on the pensions deposited with PNB, which are subject to final withholding tax.

Consequently, since Mr. Javier’s sole taxable income would have been subjected to a final withholding tax, he is not required anymore to file an income tax return [Sec. 51 (A) (2) (c), Ibid].

VIII

Mr. Cortez is a non-resident alien based in Hong Kong. During the calendar year 1999, he came to the Philippines several times and stayed in the country for an aggravated period of more than 180 days. How will Mr. Cortez be taxed on his income derived from sources within the Philippines and abroad? (5%)

SUGGESTED ANSWER:

Mr. Cortez being a non-resident alien individual who has stayed for an aggravated period of more than 180 days during the calendar year 1999, shall for that taxable year be deemed to be a non-resident alien doing business in the Philippines.

Considering the above, Mr. Cortez shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines [Sec. 25 (A) (1), NIRC of 1997]

Thus, he is allowed to avail of the itemized deductions including the personal and additional exemptions but subject to the rule on reciprocity on the personal exemptions. [Sec. 34 (A) to (J) and (M) in relation to Sec. 25 (A) (1), Ibid, Sec. 35 (D), Ibid.]

NOTE: It is suggested that full credit should be given if the examinee’s answer only covers the first two paragraphs.

IX

Under Article XIV, Section 4 (3) of the 1987 Philippine Constitution, all revenues and assets of non-stock, non-profit educational institutions, used actually, directly and exclusively for educational purposes, are exempt from taxes and duties. Are income derived from dormitories, canteens and bookstores as well as interest income on bank deposits and yields from deposit substitutes automatically exempt from taxation? Explain. (5%)

SUGGESTED ANSWER:

No. The interest income on bank deposits and yields from deposit substitutes are not automatically exempt from taxation. There must be a showing that the incomes are included in the school’s annual information return and duly audited financial statements together with:

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

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

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

The income derived from dormitories, canteens and bookstores are not also automatically exempt from taxation. There is still the requirement for evidence to show actual, direct and exclusive use for educational purposes. It is to be noted that the 1987 Philippine Constitution does not distinguish with respect to the source or origin of the income. The distinction is with respect to the use which should be actual, direct and exclusive for educational purposes.

Consequently, the provisions of Sec. 30 of the NIRC of 1997, that a nonstick and nonprofit educational institution is exempt from taxation only “in respect to income received by them as such” could not affect the constitutional tax exemption. Where the Constitution does not distinguish with respect to source or origin, the Tax Code should not make distinctions.


X

a) What is meant by taxable income? (2%)

SUGGESTED ANSWER:
Taxable income means the pertinent items of gross income specified in the Tax Code, less the deductions and /or personal and additional exemptions, if any, authorized for such types of income by the Tax Code or other special laws. (Sec. 31, NIRC of 1997)
b) Jose Miranda, a young artist and designer, received a prize of P100,000.00 for winning in the on-the-spot peace poster contest sponsored by a local Lions Club. Shall the reward be included in the gross income of the recipient for tax purposes? Explain. (3%)
SUGGESTED ANSWER:
No. It is not includable in the gross income of the recipient because the same is subject to a final tax of 20%, the amount thereof being in excess of P10,000 [Sec. 24(B)(1), NIRC of 1997] The prize constitutes a taxable income because it was made primarily in recognition of artistic achievement which he won due to an action on his part to enter the contest. [Se. 32 (B) (7) (c), NIRC of 1997] Since it is an on-the-spot contest, it is evident that he must have joined the contest in order to earn the prize or award.

[pinkalou]

XI.
On June 16, 1997, the Bureau of Internal Revenue (BIR) issued against the Estate of Jose de la Cruz a notice of deficiency estate tax assessment, inclusive of surcharge, interest and compromise penalty. The Executor of the Estate of Jose de la Cruz (Executor) filed a timely protest against the assessment and requested for waiver of the surcharge, interest and penalty. The protest was denied by the Commissioner of Internal Revenue (Commissioner) with finality on September 13, 1997. Consequently, the Executor was made to pay the deficiency assessment on October 10, 1997. The following day, the Executor filed a petition with the Court of Tax Appeals (CTA) praying for the refund of the surcharge, interest and compromise penalty. The CTA took cognizance of the case and ordered the Commissioner to make a refund. The Commissioner filed a Petition for Review with the Court of Appeals assailing the jurisdiction of the CTA and the Order to make refund to the Estate on the ground that no claim for refund was filed with the BIR.
a) Is the stand of the Commissioner correct? Reason. (2%)
SUGGESTED ANSWER:
Yes. There was no claim for refund or credit that has been duly filed with the Commissioner on Internal Revenue which is required before a suit or proceeding can be filed in any court (Sec. 229, NIRC of 1997). The denial of the claim by the Commissioner is the one which will vest the Court of Tax Appeals jurisdiction over the refund case should the taxpayer decide to appeal on time.
b) Why is the filing of an administrative claim with the BIR necessary? (3%)
SUGGESTED ANSWER:
The filing of an administrative claim for refund with the BIR is necessary in order:
1) To afford the Commissioner an opportunity to consider the claim and to have a chance to correct the errors of subordinate officers (Gonzales v. CTA, et al., 14 SCRA 79); and
2) To notify the Government that such taxes have been questioned and the notice should be borne in mind in estimating the revenue available for expenditures. (Bernejo v. Collector, G.R. No. L-3028, July 29, 1950)
XII.
a) When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. For purposes of this tax, who is a stranger? (2%)
SUGGESTED ANSWER:
A stranger is a person who is not a:
(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or
(2) Relative y consanguinity in the collateral line within the fourth degree of relationship/” [Sec. 98 (B), NIRC of 1997]
b) What conditions must occur in order that all grants, donations and contributions to non-stock, non-profit private educational institutions may be exempt from the donor’s tax under Section 101 (a) of the Tax Code? (3%)
SUGGESTED ANSWER:
The following are the conditions:
1) Not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes;
2) The educational institution is incorporated as a non-stock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all it’s income, whether student’s fees or gifts, donations, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in it’s Articles of Incorporation. [Sec. 101 (A) (3), NIRC of 1997]
XIII
Last July 12, 2000, Mr. And Mrs. Peter Camacho sold their principal residence situated in Tandang Sora, Quezon City for Ten Million Pesos (P10,000,000.00) with the intention of using the proceeds to acquire or construct a new principal residence in Aurora Hills, Baguio City.
What conditions must be met in order that the capital gains presumed to have been realized from such sale may no be subject to capital gains tax? (5%)
SUGGESTED ANSWER:
These conditions are:
1. The proceeds are fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the sale or disposition of the principal residence or eighteen (18) months from July 12, 2000.
2. The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired.
3. The Commissioner of Internal Revenue must have been informed by Mr. And Mrs. Peter Camacho within thirty (30) days from the date of sale or disposition on July 12, 2000 through a prescribed return of their intention to avail of the tax exemption.
4. That the said exemption can only be availed of once every ten (10) years.
5. If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax [Sec. 24 (D) (2), NIRC of 1997]
XIV
Mr. Reyes, a Filipino citizen engaged in the real estate business, filed his 1994 income tax return on March 20, 1995. On December 15, 1995, he left the Philippines as an immigrant to join his family in Canada. After the investigation of said return, the BIR issued a notice of deficiency income tax assessment on April 15, 1998. Finding his name to be on the list of delinquent taxpayers, he filed a protest against his assessment on the ground that he did not receive the notice of assessment and that the assessment had prescribed. Will the protest prosper? Explain. (5%)
SUGGESTED ANSWER:
No. Prescription has not set in because the period of limitations for the Bureau of Internal Revenue to issue an assessment was suspended during the time that Mr. Reyes was out of the Philippines or from the period December 15, 1995 up to December 8, 1998. (Sec. 223 in relation to Sec. 203, both of the NIRC of 1997)

XV

a) Discuss the rule on situs of taxation with respect to the imposition of the estate tax on property left behind by a non-resident decedent.

SUGGESTED ANSWER:

The value of the gross estate of a non-resident decedent who is a Filipino citizen at the time of his death shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated to the extent of the interest therein of the decedent at the time of his death [Section 85 (A), NIRC of 1997]. These properties shall have a situs of taxation in the Philippines hence subject to Philippine estate taxes.

On the other hand, in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines to the extent of the interest therein of the decedent at the time of his death shall be included in his taxable estate. Provided, that, with respect to intangible personal property, we apply the rule of reciprocity. (Ibid)

b) Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack while on a business trip to the USA. He died intestate on June 15, 2000 in New York City, leaving behind real properties situated in New York; his family home in Valle Verde, Pasig City; an office condominium in Makati City; shares of stocks in San Miguel Corporation; cash in bank; and personal belongings. The decedent is heavily insured with Insular Life. He had no known debts at the time of his death. As the sole heir and appointed Administrator, how would you determine the gross estate of the decedent? What deductions may be claimed by the estate and when and where shall the return be filed and estate tax paid?

SUGGESTED ANSWER:

The gross estate shall be determined by including the value at the time of his death all of the properties mentioned, to the extent of the interest he had at the time of his death because he is a Filipino citizen. [Section 85 (A), NIRC of 1997]

With respect to the life insurance proceeds, the amount includible in the gross estate for Philippine tax purposes would be to the extent of the amount receivable by the estate of the deceased, his executor, or administrator, under policies taken out by decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable. [Section 85 (E), NIRC of 1997]

The deductions that may be claimed by the estate are:

1) The actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed two hundred thousand pesos (P200,000). [Section 86 (A) (1) (a), NIRC of 1997]

2) The judicial expenses in the testate or intestate proceedings. [Section 86 (A) (1)
3) The value of the decedent’ s family home located in Valle Verde, Pasig City in an amount not exceeding one million pesos (P1,000,000), and upon presentation of a certification of the barangay captain of the locality that the same have been the decedent’s family home. [Section 86 (A) (4), NIRC of 1997]
4) The standard deduction of P1,000,000. [Section 86 (A) (5), NIRC of 1997]
5) Medical expenses incurred within one year from death in an amount not exceeding P500,000. [Section 86 (A) (6), NIRC of 1997]

The estate tax return shall be filed within six (6) months from the decedent’s death [Section 90 (B), NIRC of 1997], provided that the Commissioner of Internal Revenue shall have authority to grant in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return. [Section 90 (C), NIRC of 1997]

Except in cases where the Commissioner of Internal Revenue otherwise permits, the estate tax return shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of Pasig City, the City in which the decedent Mr. de la Cruz was domiciled at the time of his death. [Section 90 (D) , NIRC of 1997]

XVI

Under what conditions may the Commissioner of Internal Revenue be authorized to:
a) Compromise the payment of any internal revenue tax?

SUGGESTED ANSWER:

The Commissioner of Internal Revenue may be authorized to compromise the payment of any internal revenue tax where:
(1) A reasonable doubt as to the validity of the claim against the taxpayer exists; or
(2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax (Sec. 204).

b) Abate or cancel a tax liability?

SUGGESTED ANSWER:

The Commissioner of Internal Revenue may abate or cancel a tax liability when:
(1) The tax or any portion thereof appears to be unjustly or excessively assessed; or
(2) The administration and collection costs involved do not justify the collection of the amount due. [Section 204 (B), NIRC of 1997]


XVII

A taxpayer is suspected not to have declared his correct gross income in his return filed for 1997. The examiner requested the Commissioner to authorize him to inquire into the bank deposits of the taxpayer so that he could proceed with the net worth method of investigation to establish fraud. May the examiner be allowed to look into the taxpayer’s bank deposits? In what cases may the Commissioner or his duly authorized representative be allowed to inquire or look into the bank deposits of a taxpayer?

SUGGESTED ANSWER:

No, as this would be violative of Republic Act No. 1405, the Bank Deposits Secrecy Law.

The Commissioner of Internal Revenue or his duly authorized representative may be allowed to inquire or look into the bank deposits of a taxpayer in the following cases:
a) For the Purpose of determining the gross estate of a decedent;
b) Where the taxpayer has filed an application for compromise of his tax liability by reason of financial incapacity to pay such tax liability. [Section 6 (F), NIRC of 1997]
c) Where the taxpayer has signed a waiver authorizing the Commissioner or his duly authorized representatives to inquire into the bank deposits.

XVIII

Describe separately the procedures on the legal remedies under the Tax Code available to an aggrieved taxpayer both at the administrative and judicial levels.


SUGGESTED ANSWER:

The legal remedies of an aggrieved taxpayer under the Tax Code, both at the administrative and judicial levels, may be classified into those for assessment, collection and refund.

The procedures for the administrative remedies for assessment are as follows:
a) After receipt of the Pre-assessment Notice, he must within fifteen (15) days from receipt explain why no additional taxes should be assessed against him.
b) If the Commissioner of Internal Revenue issues an assessment notice, the taxpayer must administratively protest or dispute the assessment by filing a motion for reconsideration or reinvestigation within thirty (30) days from receipt of the notice of assessment. [4th par., Section 228, NIRC of 1997]

Within sixty (60) days from filing of the protest, the taxpayer shall submit all relevant supporting documents.

The judicial remedies of an aggrieved taxpayer relative to an assessment notice are as follows:
a) Where the Commissioner of Internal Revenue has not acted on the taxpayer’s protest within a period of one hundred eighty (180) days from submission of all relevant documents, then the taxpayer has a period of thirty (30) days from the lapse of said 180 days within which to interpose a petition for review with the Court of Tax Appeals.
b) Should the Commissioner deny the taxpayer’s protest, then he has a period of thirty (30) days from receipt of said denial within which to interpose a petition for review with the Court of Tax Appeals.

In both cases the taxpayer must apply with the Court of Tax Appeals for the issuance of an injunctive writ to enjoin the Bureau of Internal Revenue from collecting the disputed tax during the pendency of the proceedings.

The adverse decision of the Court of Tax Appeals is appealable to the SC thru rule 45 (RA 8252).


The employment by the Bureau of Internal Revenue of any of the administrative remedies for the collection of the tax like distraint, levy, etc. may be administratively appealed by the taxpayer to the Commissioner whose decision is appealable to the court of Tax Appeals under other matter arising under the provisions of the national Internal Revenue Code. The judicial appeals starts with the Court of Tax Appeals, and continues in the same manner as shown above.

Should the Bureau of Internal Revenue decide to utilize its judicial tax remedies for collecting the taxes by means of an ordinary suit it filed with the regular courts for the collection of a sum of money, the taxpayer could oppose the same going up the ladder of judicial processes from the Municipal Trial Court (as the case may be) to the Regional Trial Court, to the Court of Appeals, then to the Supreme Court.

The remedies of an aggrieved taxpayer on a claim for refund is to appeal the adverse decision of the Commissioner to the Court of Tax Appeals in the same manner outlined above.

XIX

a) Give at least two(2) fundamental principles governing real property taxation, which are limitations on the taxing power of local governments insofar as the levying of the realty tax is concerned.

SUGGESTED ANSWER:

Two (2) fundamental principles governing real property taxation are:
1) The appraisal must be at the current and fair market value; and
2) Classification for assessment must be on the basis of actual use (Section 198, Local Government Code)

ALTERNATIVE ANSWER:

The examinee should be given credit if he chooses the above two (2) or any two (2) of those enumerated below:
1) Assessment must be on the basis of uniform classification;
2) Appraisal, assessment, levy and collection shall not be let to private persons; and
3) Appraisal and assessment must be equitable. (Section 198, Local Government Code)

b) May local governments impose an annual realty tax in addition to the basic real property tax on idle or vacant lots located in residential subdivisions within their respective territorial jurisdictions?

SUGGESTED ANSWER:

Not all local government units may do so. Only provinces, cities, and municipalities within the Metro Manila area (Section 232, Local Government Code), may impose an ad valorem tax not exceeding five percent (5%) of the assessed value (Section 236, Local Government Code) of idle or vacant residential lots in a subdivision, duly approved by proper authorities regardless of area. (Section 237, Local Government Code)


XX

a) On the basis of a warrant of seizure and detention issued by the collector of Customs for the purpose of enforcing the Tariff and Customs Laws, assorted brands of cigarettes said to have been illegally imported into the Philippines were seized from a store where they were openly offered for sale. Dissatisfied with the decision rendered after hearing by the Collector of Customs on the confiscation of the articles, the importer filed a petition with the Court of Tax Appeals. The Collector moved to dismiss the petition for lack of jurisdiction. Rule on the motion.

SUGGESTED ANSWER:

Motion granted. The Court of Tax Appeals has jurisdiction only over decisions of the Commissioner of Customs in cases involving seizure, detention or release of property affected (Section 7, Republic Act No. 1125). There is no decision yet of the Commissioner which is subject to review by the Court of Tax Appeals.

ALTERNATIVE ANSWER:

Motion is granted. The Court of Tax Appeals has no jurisdiction because there is no decision rendered by the Commissioner of Customs on the seizure and forfeiture case. The taxpayer should have appealed the decision rendered by the Collector within fifteen (15) days from receipt of the decision of Commissioner of Customs. The Commissioner’s adverse decision would then be the subject of an appeal to the Court of Tax Appeals.

b) Under the same facts, could the importer file an action in the Regional Trial Court for replevin on the ground that the articles are being wrongfully detained by the Collector of Customs since the importation was not illegal and therefore exempt from seizure? Explain.

SUGGESTED ANSWER:

No. The legislators intended to divest the Regional Trial Courts of the jurisdiction to replevin a property which is a subject of seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined by the simple device of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455)

There should be no unnecessary hindrance on the government’s drive to prevent smuggling and other frauds upon the Customs. Furthermore, the Regional Trial Court do not have jurisdiction in order to render effective and efficient the collection of import and export duties due the State, which enables the government to carry out the functions it has been instituted to perform. (Jao, et al., Court of Appeals, et al., and a companion case, 249 SCRA 35, 43)

[pinkalou]

2004 Bar Questions

XI.
On June 16, 1997, the Bureau of Internal Revenue (BIR) issued against the Estate of Jose de la Cruz a notice of deficiency estate tax assessment, inclusive of surcharge, interest and compromise penalty. The Executor of the Estate of Jose de la Cruz (Executor) filed a timely protest against the assessment and requested for waiver of the surcharge, interest and penalty. The protest was denied by the Commissioner of Internal Revenue (Commissioner) with finality on September 13, 1997. Consequently, the Executor was made to pay the deficiency assessment on October 10, 1997. The following day, the Executor filed a petition with the Court of Tax Appeals (CTA) praying for the refund of the surcharge, interest and compromise penalty. The CTA took cognizance of the case and ordered the Commissioner to make a refund. The Commissioner filed a Petition for Review with the Court of Appeals assailing the jurisdiction of the CTA and the Order to make refund to the Estate on the ground that no claim for refund was filed with the BIR.
a) Is the stand of the Commissioner correct? Reason. (2%)
SUGGESTED ANSWER:
Yes. There was no claim for refund or credit that has been duly filed with the Commissioner on Internal Revenue which is required before a suit or proceeding can be filed in any court (Sec. 229, NIRC of 1997). The denial of the claim by the Commissioner is the one which will vest the Court of Tax Appeals jurisdiction over the refund case should the taxpayer decide to appeal on time.
b) Why is the filing of an administrative claim with the BIR necessary? (3%)
SUGGESTED ANSWER:
The filing of an administrative claim for refund with the BIR is necessary in order:
1) To afford the Commissioner an opportunity to consider the claim and to have a chance to correct the errors of subordinate officers (Gonzales v. CTA, et al., 14 SCRA 79); and
2) To notify the Government that such taxes have been questioned and the notice should be borne in mind in estimating the revenue available for expenditures. (Bernejo v. Collector, G.R. No. L-3028, July 29, 1950)
XII.
a) When the donee or beneficiary is a stranger, the tax payable by the donor shall be 30% of the net gifts. For purposes of this tax, who is a stranger? (2%)
SUGGESTED ANSWER:
A stranger is a person who is not a:
(1) Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or
(2) Relative y consanguinity in the collateral line within the fourth degree of relationship/” [Sec. 98 (B), NIRC of 1997]
b) What conditions must occur in order that all grants, donations and contributions to non-stock, non-profit private educational institutions may be exempt from the donor’s tax under Section 101 (a) of the Tax Code? (3%)
SUGGESTED ANSWER:
The following are the conditions:
1) Not more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes;
2) The educational institution is incorporated as a non-stock entity, paying no dividends, governed by trustees who receive no compensation, and devoting all it’s income, whether student’s fees or gifts, donations, subsidies or other forms of philanthropy, to the accomplishment and promotion of the purposes enumerated in it’s Articles of Incorporation. [Sec. 101 (A) (3), NIRC of 1997]
XIII
Last July 12, 2000, Mr. And Mrs. Peter Camacho sold their principal residence situated in Tandang Sora, Quezon City for Ten Million Pesos (P10,000,000.00) with the intention of using the proceeds to acquire or construct a new principal residence in Aurora Hills, Baguio City.
What conditions must be met in order that the capital gains presumed to have been realized from such sale may no be subject to capital gains tax? (5%)
SUGGESTED ANSWER:
These conditions are:
1. The proceeds are fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the sale or disposition of the principal residence or eighteen (18) months from July 12, 2000.
2. The historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired.
3. The Commissioner of Internal Revenue must have been informed by Mr. And Mrs. Peter Camacho within thirty (30) days from the date of sale or disposition on July 12, 2000 through a prescribed return of their intention to avail of the tax exemption.
4. That the said exemption can only be availed of once every ten (10) years.
5. If there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax [Sec. 24 (D) (2), NIRC of 1997]
XIV
Mr. Reyes, a Filipino citizen engaged in the real estate business, filed his 1994 income tax return on March 20, 1995. On December 15, 1995, he left the Philippines as an immigrant to join his family in Canada. After the investigation of said return, the BIR issued a notice of deficiency income tax assessment on April 15, 1998. Finding his name to be on the list of delinquent taxpayers, he filed a protest against his assessment on the ground that he did not receive the notice of assessment and that the assessment had prescribed. Will the protest prosper? Explain. (5%)
SUGGESTED ANSWER:
No. Prescription has not set in because the period of limitations for the Bureau of Internal Revenue to issue an assessment was suspended during the time that Mr. Reyes was out of the Philippines or from the period December 15, 1995 up to December 8, 1998. (Sec. 223 in relation to Sec. 203, both of the NIRC of 1997)

XV

a) Discuss the rule on situs of taxation with respect to the imposition of the estate tax on property left behind by a non-resident decedent.

SUGGESTED ANSWER:

The value of the gross estate of a non-resident decedent who is a Filipino citizen at the time of his death shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated to the extent of the interest therein of the decedent at the time of his death [Section 85 (A), NIRC of 1997]. These properties shall have a situs of taxation in the Philippines hence subject to Philippine estate taxes.

On the other hand, in the case of a non-resident decedent who at the time of his death was not a citizen of the Philippines, only that part of the entire gross estate which is situated in the Philippines to the extent of the interest therein of the decedent at the time of his death shall be included in his taxable estate. Provided, that, with respect to intangible personal property, we apply the rule of reciprocity. (Ibid)

b) Mr. Felix de la Cruz, a bachelor resident citizen, suffered from a heart attack while on a business trip to the USA. He died intestate on June 15, 2000 in New York City, leaving behind real properties situated in New York; his family home in Valle Verde, Pasig City; an office condominium in Makati City; shares of stocks in San Miguel Corporation; cash in bank; and personal belongings. The decedent is heavily insured with Insular Life. He had no known debts at the time of his death. As the sole heir and appointed Administrator, how would you determine the gross estate of the decedent? What deductions may be claimed by the estate and when and where shall the return be filed and estate tax paid?

SUGGESTED ANSWER:

The gross estate shall be determined by including the value at the time of his death all of the properties mentioned, to the extent of the interest he had at the time of his death because he is a Filipino citizen. [Section 85 (A), NIRC of 1997]

With respect to the life insurance proceeds, the amount includible in the gross estate for Philippine tax purposes would be to the extent of the amount receivable by the estate of the deceased, his executor, or administrator, under policies taken out by decedent upon his own life, irrespective of whether or not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is irrevocable. [Section 85 (E), NIRC of 1997]

The deductions that may be claimed by the estate are:

1) The actual funeral expenses or in an amount equal to five percent (5%) of the gross estate, whichever is lower, but in no case to exceed two hundred thousand pesos (P200,000). [Section 86 (A) (1) (a), NIRC of 1997]

2) The judicial expenses in the testate or intestate proceedings. [Section 86 (A) (1)
3) The value of the decedent’ s family home located in Valle Verde, Pasig City in an amount not exceeding one million pesos (P1,000,000), and upon presentation of a certification of the barangay captain of the locality that the same have been the decedent’s family home. [Section 86 (A) (4), NIRC of 1997]
4) The standard deduction of P1,000,000. [Section 86 (A) (5), NIRC of 1997]
5) Medical expenses incurred within one year from death in an amount not exceeding P500,000. [Section 86 (A) (6), NIRC of 1997]

The estate tax return shall be filed within six (6) months from the decedent’s death [Section 90 (B), NIRC of 1997], provided that the Commissioner of Internal Revenue shall have authority to grant in meritorious cases, a reasonable extension not exceeding thirty (30) days for filing the return. [Section 90 (C), NIRC of 1997]

Except in cases where the Commissioner of Internal Revenue otherwise permits, the estate tax return shall be filed with an authorized agent bank, or Revenue District Officer, Collection Officer, or duly authorized Treasurer of Pasig City, the City in which the decedent Mr. de la Cruz was domiciled at the time of his death. [Section 90 (D) , NIRC of 1997]

XVI

Under what conditions may the Commissioner of Internal Revenue be authorized to:
a) Compromise the payment of any internal revenue tax?

SUGGESTED ANSWER:

The Commissioner of Internal Revenue may be authorized to compromise the payment of any internal revenue tax where:
(1) A reasonable doubt as to the validity of the claim against the taxpayer exists; or
(2) The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax (Sec. 204).

b) Abate or cancel a tax liability?

SUGGESTED ANSWER:

The Commissioner of Internal Revenue may abate or cancel a tax liability when:
(1) The tax or any portion thereof appears to be unjustly or excessively assessed; or
(2) The administration and collection costs involved do not justify the collection of the amount due. [Section 204 (B), NIRC of 1997]


XVII

A taxpayer is suspected not to have declared his correct gross income in his return filed for 1997. The examiner requested the Commissioner to authorize him to inquire into the bank deposits of the taxpayer so that he could proceed with the net worth method of investigation to establish fraud. May the examiner be allowed to look into the taxpayer’s bank deposits? In what cases may the Commissioner or his duly authorized representative be allowed to inquire or look into the bank deposits of a taxpayer?

SUGGESTED ANSWER:

No, as this would be violative of Republic Act No. 1405, the Bank Deposits Secrecy Law.

The Commissioner of Internal Revenue or his duly authorized representative may be allowed to inquire or look into the bank deposits of a taxpayer in the following cases:
a) For the Purpose of determining the gross estate of a decedent;
b) Where the taxpayer has filed an application for compromise of his tax liability by reason of financial incapacity to pay such tax liability. [Section 6 (F), NIRC of 1997]
c) Where the taxpayer has signed a waiver authorizing the Commissioner or his duly authorized representatives to inquire into the bank deposits.

XVIII

Describe separately the procedures on the legal remedies under the Tax Code available to an aggrieved taxpayer both at the administrative and judicial levels.


SUGGESTED ANSWER:

The legal remedies of an aggrieved taxpayer under the Tax Code, both at the administrative and judicial levels, may be classified into those for assessment, collection and refund.

The procedures for the administrative remedies for assessment are as follows:
a) After receipt of the Pre-assessment Notice, he must within fifteen (15) days from receipt explain why no additional taxes should be assessed against him.
b) If the Commissioner of Internal Revenue issues an assessment notice, the taxpayer must administratively protest or dispute the assessment by filing a motion for reconsideration or reinvestigation within thirty (30) days from receipt of the notice of assessment. [4th par., Section 228, NIRC of 1997]

Within sixty (60) days from filing of the protest, the taxpayer shall submit all relevant supporting documents.

The judicial remedies of an aggrieved taxpayer relative to an assessment notice are as follows:
a) Where the Commissioner of Internal Revenue has not acted on the taxpayer’s protest within a period of one hundred eighty (180) days from submission of all relevant documents, then the taxpayer has a period of thirty (30) days from the lapse of said 180 days within which to interpose a petition for review with the Court of Tax Appeals.
b) Should the Commissioner deny the taxpayer’s protest, then he has a period of thirty (30) days from receipt of said denial within which to interpose a petition for review with the Court of Tax Appeals.

In both cases the taxpayer must apply with the Court of Tax Appeals for the issuance of an injunctive writ to enjoin the Bureau of Internal Revenue from collecting the disputed tax during the pendency of the proceedings.

The adverse decision of the Court of Tax Appeals is appealable to the SC thru rule 45 (RA 8252).


The employment by the Bureau of Internal Revenue of any of the administrative remedies for the collection of the tax like distraint, levy, etc. may be administratively appealed by the taxpayer to the Commissioner whose decision is appealable to the court of Tax Appeals under other matter arising under the provisions of the national Internal Revenue Code. The judicial appeals starts with the Court of Tax Appeals, and continues in the same manner as shown above.

Should the Bureau of Internal Revenue decide to utilize its judicial tax remedies for collecting the taxes by means of an ordinary suit it filed with the regular courts for the collection of a sum of money, the taxpayer could oppose the same going up the ladder of judicial processes from the Municipal Trial Court (as the case may be) to the Regional Trial Court, to the Court of Appeals, then to the Supreme Court.

The remedies of an aggrieved taxpayer on a claim for refund is to appeal the adverse decision of the Commissioner to the Court of Tax Appeals in the same manner outlined above.

XIX

a) Give at least two(2) fundamental principles governing real property taxation, which are limitations on the taxing power of local governments insofar as the levying of the realty tax is concerned.

SUGGESTED ANSWER:

Two (2) fundamental principles governing real property taxation are:
1) The appraisal must be at the current and fair market value; and
2) Classification for assessment must be on the basis of actual use (Section 198, Local Government Code)

ALTERNATIVE ANSWER:

The examinee should be given credit if he chooses the above two (2) or any two (2) of those enumerated below:
1) Assessment must be on the basis of uniform classification;
2) Appraisal, assessment, levy and collection shall not be let to private persons; and
3) Appraisal and assessment must be equitable. (Section 198, Local Government Code)

b) May local governments impose an annual realty tax in addition to the basic real property tax on idle or vacant lots located in residential subdivisions within their respective territorial jurisdictions?

SUGGESTED ANSWER:

Not all local government units may do so. Only provinces, cities, and municipalities within the Metro Manila area (Section 232, Local Government Code), may impose an ad valorem tax not exceeding five percent (5%) of the assessed value (Section 236, Local Government Code) of idle or vacant residential lots in a subdivision, duly approved by proper authorities regardless of area. (Section 237, Local Government Code)


XX

a) On the basis of a warrant of seizure and detention issued by the collector of Customs for the purpose of enforcing the Tariff and Customs Laws, assorted brands of cigarettes said to have been illegally imported into the Philippines were seized from a store where they were openly offered for sale. Dissatisfied with the decision rendered after hearing by the Collector of Customs on the confiscation of the articles, the importer filed a petition with the Court of Tax Appeals. The Collector moved to dismiss the petition for lack of jurisdiction. Rule on the motion.

SUGGESTED ANSWER:

Motion granted. The Court of Tax Appeals has jurisdiction only over decisions of the Commissioner of Customs in cases involving seizure, detention or release of property affected (Section 7, Republic Act No. 1125). There is no decision yet of the Commissioner which is subject to review by the Court of Tax Appeals.

ALTERNATIVE ANSWER:

Motion is granted. The Court of Tax Appeals has no jurisdiction because there is no decision rendered by the Commissioner of Customs on the seizure and forfeiture case. The taxpayer should have appealed the decision rendered by the Collector within fifteen (15) days from receipt of the decision of Commissioner of Customs. The Commissioner’s adverse decision would then be the subject of an appeal to the Court of Tax Appeals.

b) Under the same facts, could the importer file an action in the Regional Trial Court for replevin on the ground that the articles are being wrongfully detained by the Collector of Customs since the importation was not illegal and therefore exempt from seizure? Explain.

SUGGESTED ANSWER:

No. The legislators intended to divest the Regional Trial Courts of the jurisdiction to replevin a property which is a subject of seizure and forfeiture proceedings for violation of the Tariff and Customs Code otherwise, actions for forfeiture of property for violation of the Customs laws could easily be undermined by the simple device of replevin. (De la Fuente v. De Veyra, et al., 120 SCRA 455)

There should be no unnecessary hindrance on the government’s drive to prevent smuggling and other frauds upon the Customs. Furthermore, the Regional Trial Court do not have jurisdiction in order to render effective and efficient the collection of import and export duties due the State, which enables the government to carry out the functions it has been instituted to perform. (Jao, et al., Court of Appeals, et al., and a companion case, 249 SCRA 35, 43)