TAXATION LAW BAR QUESTIONS & ANSWERS

Submitted by: BALUYUT, Maria C ra! " #E LEON, #i" $A#OR, %e" Reye& SUC$AN$, 'u&ti"
I( X Corporation was the recipient in 1990 of two tax exemptions both from Congress, one law exempting the companys bond issues from taxes and the other exempting the company from taxes in the operation of its public utilities. The two laws extending the tax exemptions were re o!ed by Congress before their expiry dates. "ere the re ocation constitutional# )*++, Bar-

Suggested Answer: $es. The exempting statutes are both granted unilaterally by Congress in the exercise of taxing powers. %ince taxation is the rule and tax exemption, the exception, any tax exemption unilaterally granted can be withdrawn at the pleasure of the taxing authority without iolating the constitution &'actan Cebu (nternational )irport )uthority . 'arcos* +either of these were issued by the taxing authority in a contract lawfully entered by it so that their re ocation would not constitute an impairment of the obligations of contracts. Alternative Answer: +o. the withdrawal of the tax exemption amounts to a depri ation of property without due process of law, hence unconstitutional. II( ,escribe the power of taxation. 'ay a legislati e body enact laws to raise re enues in the absence of a constitutional pro ision granting said body the power to tax# -xplain. ).//0 BarSuggested Answer: $es, the legislati e body may enact laws e en in the absence of a constitutional pro ision because the power to tax is inherent in the go ernment and not merely a constitutional grant. The power of taxation is an essential and inherent attribute of so ereignty belonging as a matter of right to e ery independent go ernment without being expressly granted by the people &.epsi/Cola 0ottling Company of the .hilippines, (nc. . 'unicipality of Tanauan 1eyte* III( Taxes are assessed for the purpose of generating re enue to be used for public needs. Taxation itself is the power by which the %tate raises re enue to defray the expenses of go ernment. ) 2urist said that a tax is what we pay for ci ili3ation. (n our 2urisdiction, which of the following statements may be erroneous4 1* Taxes are pecuniary in nature. 5* Taxes are enforced charges and contributions. 6* Taxes are imposed on persons and property within the territorial 2urisdiction of a %tate. 7* Taxes are le ied by the executi e branch of the go ernment. 8* Taxes are assessed according to a reasonable rule of apportionment. 9ustify your answer or choice briefly. ).//1 BarSuggested Answer: +umber 7. Taxes are le ied by the executi e branch of go ernment. This statement is erroneous because le y refers to the act of imposition by the legislature which is done through the enactment of a tax law. 1e y is an exercise of the power to tax which is exclusi ely legislati e in nature and character. Clearly, taxes are not le ied by the executi e branch of go ernment. &9:.C . )lbay* I2

X is the owner of a residential lot situated at ;uirino ) enue, .asay City. The lot has an area of 600 s<uare meters. =n 9une 1, 1997, 100 s<uare meters of said lot owned by X was expropriated by the go ernment to be used in the widening of ;uirino ) enue, for .600.000.00 representing the estimated assessed alue of said portion. >rom 1991 to 1998, X, who is a businessman, has not been paying his income taxes. X is now being assessed for the unpaid income taxes in the total amount of .180,000.00. X claims his income tax liability has already been compensated by the amount of .600.000.00 which the go ernment owes him for the expropriation of his property. ,ecide. )*++3 BarSuggested Answer4 The income tax liability of X can not be compensated with the amount owed by the ?o ernment as compensation for his property expropriated, taxes are of distinct !ind, essence and nature than ordinary obligations. Taxes and debts cannot be the sub2ect of compensation because the ?o ernment and X are not mutually creditors and debtors of each other and a claim for taxes is not a debt, demand, contract, or 9udgment as is allowable to be set off. &>rancia s. ()C* 2( 'r. .ascuals income from leasing his property reaches the maximum rate of tax under the law. @e donated one/half of his said property to a non/stoc!, non/profit educational institution whose income and assets are actually, directly and exclusi ely used for educational purposes, and therefore <ualified for tax exemption under )rticle X(:, %ection 7 &6* of the Constitution and %ection 60 &h* of the Tax Code. @a ing thus transferred a portion of his said asset, 'r. .ascual succeeded in paying a lesser tax on the rental income deri ed from his property. (s there tax a oidance or tax e asion# -xplain. )./// BarSuggested Answer: There is tax a oidance. 'r. .ascual has exploited a fully permissi e alternati e 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 li!ewise exempt from the donorAs tax. The donation is the legal means employed to transfer the incidence of income tax on the rental income. 2I( "hen may a taxpayers suit be allowed# )*++3 BarSuggested Answer: ) taxpayers suit may only be allowed when an act complained of, which may include a legislati e enactment, directly in ol es the illegal disbursement of public funds deri ed from taxation &.ascual . %ecretary of .ublic "or!s* 2II ?old and %il er Corporation ga e extra 17th month bonus to all its officials and employees in the total amount of .B8 'illion. "hen it filed its corporate income tax return the following year, the corporation declared a net operating loss. "hen the income tax return of the corporation was re iewed by the 0(C the following year, it disallowed as item of deduction the .B8 'illion bonus the corporation ga e 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. (f you were the 0(C Commissioner, how will you resol e the issue# ).//3 BarSuggested Answer: ( will disallow the expense. ) bonus is ordinary and necessary where said expenditure is &1* appropriate and helpful in the de elopment of the taxpayers business and &5* is normal in relation to the business of the taxpayer and the surrounding circumstances.

To determine the reasonableness of the bonus it must be commensurate with ser ices performed by the officials and employees. =ther factors to consider are whether the payment was made in good faithD the character of the taxpayerAs businessD the olume and amount of its net earningsD its localityD the type and extent of the ser ices renderedD the salary policy of the corporationD the si3e of the particular businessD the employeesA <ualification and contributions to the business entureD and general economic conditions &)tlas 'ining . C(C, ?.C. +o. 15E911, 9anuary 5B, 19F1*. @owe er, since the business suffers from a net operating loss, ( will rule that the bonus is an unreasonable expense. 2III 'r. >rancisco borrowed .10,000.00 from his friend 'r. ?utierre3 payable in one year without interest. "hen the loan became due 'r. >rancisco told 'r. ?utierre3 that he &'r. >rancisco* was unable to pay because of business re erses. 'r. ?utierre3 too! pity on 'r. >rancisco and condoned the loan. 'r. >rancisco was sol ent at the time he borrowed the . 10,000.00 and at the time the loan was condoned. ,id 'r. >rancisco deri e any income from the cancellation or condonation of his indebtedness# -xplain. )*++0 BarSuggested Answer: +o, 'r. >rancisco did not deri e any income from the cancellation or condonation of his indebtedness. %ince it is ob ious that the creditor merely desired to benefit the debtor in iew of the absence of consideration for the cancellation, the amount of the debt is considered as a gift from the creditor to the debtor and need not be included in the latterAs gross income. IX ) bachelor was employed by Corporation ) on the first wor!ing day of 9anuary 199E on a part/time basis with a salary of .6,800.00 a month. @e then recei ed the 16th month pay. (n %eptember 199E, he accepted another part/time 9ob from Corporation 0 from which he recei ed a total compensation of .17,800.00 for the year 199E. The correct total taxes were withheld from both earnings. "ith the withholding taxes already paid, would he still be re<uired to file an income tax return for his 199E income# )*++, BarSuggested Answer: $es, because what is exempt from filing are those indi iduals who ha e total compensation income not exceeding .E0.000 with the taxes correctly withheld only by one employer. (n this case, e en if his aggregate compensation income from both his employers does not exceed .E0.000 and that total withholding taxes were correctly withheld by his employers, the fact that he deri es compensation income concurrently from two employers at anytime during the taxable year, does not exempt him from filing his income tax return &C) B79B, as implemented by CC +o. 7/96*. X( 'r. 9a ier is a non/resident senior citi3en. @e recei es a monthly pension from the ?%(% which he deposits with the .+0/'a!ati 0ranch. (s he exempt from income tax and therefore not re<uired to file an income tax return# )./// BarSuggested Answer: 'r. 9a ier is exempt from income tax on his monthly ?%(% pension &%ec. 65&0*&E*&f*, +(CC of 199B* but not on the interest income that might accrue on the pensions deposited with .+0 which are sub2ect to final withholding tax. Conse<uently, since 'r. 9a ierAs sole taxable income would ha e been sub2ected to a final withholding tax, he is not re<uired anymore to file an income tax return. &%ec. 81 &)* &5* &c*. (bidG. XI(

C)' got married to 1(%) last 9anuary 5006. =n +o ember 60, 5006, 1(%) ga e birth to twins. Hnfortunately, howe er, 1(%) died in the course of her deli ery. ,ue to complications, one of the twins also died on ,ecember 18, 5006. (n preparing his (ncome Tax Ceturn &(TC* for the year 5006, what should C)' indicate in the (TC as his ci il status4 &a* singleD &b* marriedD &c* @ead of the familyD &d* widowerD &e* none of the abo e# "hy# Ceason. ).//1 Bar-( Suggested Answer: C)' should indicate I&b* marriedI as his ci il status in preparing his (ncome Tax Ceturn for the year 5006. The death of his wife during the year will not change his status because should the spouse die during the taxable year, the taxpayer may still claim the same exemptions &that of being married* as if the spouse died at the close of such year &%ection 68JC2, +(CC*. XII( 'r. )drian is an executi e of a big business corporation. )side from his salary, his employer pro ides him with the following benefits4 free use of a residential house in an exclusi e subdi ision, free use of a limousine and membership in a country club where he can entertain customers of the corporation. "hich of these benefits, if any, must 'r. )drian report as income# -xplain. )*++0 BarSuggested Answer: 'r. )drian must report the imputed rental alue of the house and limousine as income. (f the rental alue exceeds the personal needs of 'r. )drian because he is expected to pro ide accommodation in said house for company guests or the car is used partly for business purpose, then 'r. )drian is entitled only to a ratable rental alue of the house and limousine as exclusion from gross income and only a reasonable amount should be reported as income. This is because the free housing and use of the limousine are gi en partly for the con enience and benefit of the employer &Collector s. @enderson*. XIII( X, while dri ing home from his office, was seriously in2ured when his automobile was bumped from behind by a bus dri en by a rec!less dri er. )s a result, he had to pay .500,000.00 to his doctor and .100, 000.00 to the hospital where he was confined for treatment. @e filed a suit against the bus dri er and the bus company and was awarded and paid actual damages of .600, 000.00 &for his doctor and hospitali3ation bills*, .100,000.00 by way of moral damages, and .80,000.00 for what he had to pay his attorney for bringing his case to court. "hich, if any, of the foregoing awards are taxable income to X and which are not# -xplain. ).//4 BarSuggested Answer: +othing is taxable. Hnder the Tax Code, any amount recei ed as compensation for personal in2uries or sic!ness, plus the amounts for any damages recei ed whether by suit or agreement, on account of such in2uries or sic!ness shall be excluded from gross income. %ince the entire amount of .780, 000.00 recei ed are award of damages on account of the in2uries sustainedD all shall be excluded from his gross income. =b iously, these damages are considered by law as mere return of capital. &%ection 65&0*&7*, 199B Tax Code* XI2( %tate with reasons the tax treatment of the following in the preparation of annual income tax returns4 16th month pay and de minimis benefits ).//0 BarSuggested Answer: The 16th month pay not exceeding .60,000.00 shall not be reported in the income tax return because it is excluded from gross income &%ec. 65K0GKBG, KeG, +(CC* The

amount of the 16th month pay in excess of .60,000.00 shall be reported in the annual income tax return. ,e minimis benefits which do not exceed the ceilings are excluded from gross income, and not to be considered for determining the .60,000.00 ceiling hence not reportable in the annual income tax return. &%ec. 5.BF.1K)GK6G, C.C. 5/9F as amended by %ec. 5.66 KCG and further amended by C.C. +o. F/5000* X2( The Constitution exempts from taxation charitable in/ stitutions, churches, parsonages or con ents appurtenant thereto, mos<ues arid non/profit cemeteries and lands, buildings and impro ements actually, directly and exclu/ si ely used for religious, charitable and educational purposes. 'ercy @ospital is a 100/bed hospital organi3ed for charity patients. Can said hospital claim exemption from taxation under the abo e/ <uoted constitutional pro ision# -xplain. )*++3 BarSuggested Answer: $es. 'ercy @ospital can claim exemption from taxation under the pro ision of the Constitution, but only with respect to real property taxes pro ided that such real properties are used actually, directly and exclusi ely for charitable purposes. X2I( 9ose 'iranda, a young artist and designer, recei ed a pri3e of .100,000.00 for winning in the on/the/spot peace poster contest sponsored by a local 1ions Club. %hall the reward be included in the gross income of the recipient for tax purposes# -xplain. )./// BarSuggested Answer: +o. (t is not includable in the gross income of the recipient because the same is sub2ect to a final tax of 50L, the amount thereof being in excess of .10.000 &%ec. 57&0*M1*, +(CC of 199B*. The pri3e constitutes a taxable income because it was made primarily in recognition of artistic achie ement which he won due to an action on his part to enter the contest. K%ec. 65 &0* &B* &c*, +(CC of 199BG %ince it is an on/the/spot contest, it is e ident that he must ha e 2oined the contest in order to earn the pri3e or award. X2II( =nyoc, an amateur boxer, won in a boxing competition sponsored by the ?old Cup 0oxing Council, a sports association duly accredited by the .hilippine 0oxing )ssociation. =nyoc recei ed the amount of .800,000 as his pri3e which was donated by )yala 1and Corporation. The 0(C tried to collect income tax on the amount recei ed by =nyoc and donorAs tax from )yala 1and Corporation, which taxes, =nyoc and )yala 1and Corporation refuse to pay. ,ecide. )*++3 BarSuggested Answer: The pri3e will not constitute a taxable income to =nyoc, hence the 0(C is not correct in imposing the income tax. C.). +o. B879 explicitly pro ides that A)ll pri3es and awards granted to athletes in local and international sports tournaments and competitions held in the .hilippines or abroad and sanctioned by their respecti e national sports associations shall be exempt from income taxI. +either is the 0(C correct in collecting the donorAs tax from )yala 1and Corporation. The law is clear when it categorically stated IThat the donorAs of said pri3es and awards shall be exempt from the payment of the donorAs tax.I X2III( ), a doctor by profession, sold in the year 5000 a parcel of land which he bought as a form of in estment in 1990 for .hp 1 million. The land was sold to 0, his colleague, at a time when the real estate prices had gone down and so the land was sold only for

.hp F00,000 which was then the fair mar!et alue of the land. @e used the proceeds to finance his trip to the Hnited %tates. @e claims that he should not be made to pay the EL final tax because he did not ha e any actual gain on the sale. (s his contention correct# "hy# ).//* BarSuggested Answer: +o. The EL capital gains tax on sale of a real property held as capital asset is imposed on the income presumed to ha e been reali3ed from the sale which is the fair mar!et alue or selling price thereof, whiche er is higher. &%ection 57&,*, +(CC*. )ctual gain is not re<uired for the imposition of the tax but it is the gain by fiction of law which is taxable. XIX( ), aged 90 years and suffering from incurable cancer, on )ugust 1, 5001 wrote a will and, on the same day, made se eral inter/ i os gifts to his children. Ten days later, he died. (n your opinion, are the inter/ i os gifts considered transfers in contemplation of death for purposes of determining properties to be included in his gross estate# -xplain your answer. ).//* BarSuggested Answer: $es. "hen the donor ma!es his will within a short time of, or simultaneously with, the ma!ing of gifts, the gifts are considered as ha ing been made in contemplation of death. &Coces . .osadas, 8F .hil. 10F*. =b iously, the intention of the donor in ma!ing the inter/ i os gifts is to a oid the imposition of the estate tax and since the donees are li!ewise his forced heirs who are called upon to inherit, it will create a presumption 2uris tantum that said donations were made mortis causa, hence, the properties donated shall be included as part of )As gross estate. XX( 'r. %antos died intestate in 19F9 lea ing his spouse and fi e children as the only heirs. The estate consisted of a family home and a four/door apartment which was being rented to tenants. "ithin the year, an extra2udicial settlement of the estate was executed from the heirs, each of them recei ing hisJher due share. The sur i ing spouse assumed administration of the property. -ach year, the net income from the rental property was distributed to all, proportionately, on which they paid respecti ely, the corresponding income tax. (n 1997, the income tax returns of the heirs were examined and deficiency income tax assessments were issued against each of them for the years 19F9 to 1996, inclusi e, as ha ing entered into an unregistered partnership. "ere the assessments 2ustified# )*++, BarSuggested Answer: $es, the assessments were 2ustified because for income tax purposes, the co/ ownership of inherited property is automatically con erted into an unregistered partnership from the moment the said properties are used as a common fund with intent to produce profits for the heirs in proportion to their shares in the inheritance. >rom the moment of such partition, the heirs are entitled already to their respecti e definite shares of the estate and the income thereof, for each of them to manage and dispose of as exclusi ely his own without the inter ention of the other heirs, and, accordingly, he becomes liable indi idually for all taxes in connection therewith. (f after such partition, he allows his shares to be held in common with his co/heir under a single management to be used with the intent of ma!ing profit thereby in proportion to his share, there can be no doubt that, e en if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed&1oren3o =na, et al . C(C*

Alternative Answer: +o, the assessments are not 2ustified. The mere sharing of income does not of itself establish a partnership absent any clear intention of the co/owners who are only awaiting li<uidation of the estate.