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TAX REVIEW

1. Alain Descartes, a French citizen permanently residing in the Philippines,

received several items during the taxable year. Which among the following is
NOT subject to Philippine income taxation?

a. Consultancy fees received for designing a computer program and

installing the same in the Shanghai facility of a Chinese firm.
b. Interests from his deposits in a local bank of foreign currency earned
abroad converted to Philippine pesos.
c. Dividends received from an American corporation which derived 60%
of its annual gross receipts from Philippine sources for the past 7
years.
d. Gains derived from the sale of his condominium unit located in The
Fort, Taguig City to another resident alien.

2. For income tax purposes, the source of the service income is important for the
taxpayer, who is a:

a. Filipino citizen residing in Makati City;

b. Non-resident Filipino citizen working and residing in London, United
Kingdom;
c. Japanese citizen who is married to a Filipina citizen and residing in
their family home located in Fort Bonifacio, Taguig City;
d. Domestic corporation.

3. An individual, who is a real estate dealer, sold a residential lot in Quezon City
at a gain of P100,000.00 (selling price of P900,000.00 and cost is
P800,000.00). The sale is subject to income tax as follows:

a. 6% capital gains tax on the gain;

b. 6% capital gains tax on the gross selling price or fair market value
whichever is higher;
c. Ordinary income tax at the graduated rates of 20% to 35% of net
taxable income only on amounts exceeding P250,000.00;
d. 30% income tax on net taxable income.

4. Which of the following is an exclusion from gross income?

a. Salaries and wages

b. Cash dividends
c. Liquidating dividends after dissolution of a corporation
d. De minimis benefits
e. Embezzled money

5. Distinguish a “capital asset” from an “ordinary asset”.

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6. “A” was engaged by Premiere Movies to perform a pantomime act in a movie

it was making. “A” was to be paid PhP20,000.00 for his performance and the
parties signed the necessary contract. “A” then gratuitously assigned his
rights under the contract to his son, “B”. “B” later on collected the
PhP20,000.00 from Premiere Movies. Is the PhP20,000.00 taxable to “A”?
Reasons.

7. In 2015, X started constructing a commercial building with spaces for lease to

the public. X required Y, a prospective lessee to sign a pre-lease agreement,
which principally provided: (a) that the lessee shall extend to the lessor a non-
interest bearing loan of PhP100,000.00 payable within twelve (12) months;
and (b) that in consideration of the loan, the lessee and his rentals shall not
be increased while the loan remains unpaid. Upon completion of the building
in 2017, Y extended the loan of PhP100,000.00 to X and he was given a
space in its ground floor. May the BIR consider the PhP100,000.00 as taxable
income of X? Reasons.

8. “X” issued a check drawn on a bank in which he has no funds. He negotiated

the check and received PhP10,000.00. He tried his luck in a casino but lost.
Thereafter, he was charged and convicted for passing a worthless check. The
BIR wants to tax him for the PhP10,000.00 he got from negotiating the check.
Decide.

9. Mr. Lajojo is a big-time swindler. In one year he was able to earn P1 million
from his swindling activities. When the Commissioner of Internal Revenue
discovered his income from swindling, the Commissioner assessed him a
deficiency income tax for such income.

The lawyer of Mr. Lajojo protested the assessment on the following

grounds:

a. The income applies only to legal income, not to illegal income.

b. Mr. Lajojo’s receipts from his swindling did not constitute income
because he was under obligation to return the amount he had swindled,
hence, his receipt from swindling was similar to a loan, which is not income,
because for every peso borrowed, he has a corresponding liability to pay one
peso; and,

c. If he has to pay the deficiency income tax assessment, there will be

hardly anything left to return to the victims of the swindling.

How will you rule on each of the three grounds for the protest? Explain.

10. In order to facilitate the processing of its application for a license from a
government office, Corporation A found it necessary to pay the amount of
Php100,000 as a bribe to the approving official. Is the Php100,000 deductible
from the gross income of Corporation A? On the other hand, is the
Php100,000 taxable income of the approving official?
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11. Onesiphorus, a junior executive, owed his employer Ᵽ4,000.00. The money
was advanced to him to pay for his personal bills. Just recently, he submitted
an excellent report to his employer who became very pleased because it
attracted a big client to their company. The employer, therefore, decided to
cancel the debt of Onesiphorus and, in addition, gave him a round trip ticket to
Hong Kong plus pocket money of Ᵽ5,000.00.

How are the above items to be treated on the income tax return of
Onesiphorus? Explain.

12. Give an example of the application of the tax benefit rule.

13. HK Co. is a Hong Kong company, which has a duly licensed Philippine branch
engage in trading activities in the Philippines. HK Co. also invested in 40% of
the shares of stock of A Co., a Philippine corporation. These shares are
booked in the Head Office of HK Co. and are not reflected as assets of the
Philippine branch. In 2017, A Co. declared dividends to its stockholders.
Before remitting the dividends to HK Co., A Co. seeks your advice as to
whether it will subject the remittance to WT. No need to discuss WT rates, if
applicable. Focus your discussion on what is the issue.

14. Pacific, Inc. is engaged in overseas shipping. It time chartered one of its ships
to a Japanese company on a five-year term. The charter was consummated
through the efforts of Kamino Moto, a Tokyo based broker. The negotiation
took place in Tokyo. The agreement calls for Pacific, Inc. to pay Kamino Moto
$50,000.00. Your opinion is sought whether Pacific, Inc. should withhold the
tax before sending the compensation of Kamino Moto.

15. On the part of the contributor, are contributions to a candidate in an election

allowed as deduction from gross income?

16. A fringe benefit is defined as being any good, service or other benefit
furnished or granted in cash or in kind by an employer to an individual
employee. Would it be the employer or the employee who is legally required
to pay an income tax on it?

17. Mr. Adrian is an executive of a big business corporation. Aside from his
salary, his employer provides him with the following benefits: the free use of a
residential house in an exclusive subdivision, free use of limousine and
membership in a country club where he can entertain customers of the
corporation.

Which of these benefits, if any, must Mr. Adrian report as income?

Explain.

18. The employment contract of the local manager of the TWA, an American
corporation engaged in the airline business provides for (1) a monthly salary
of US$4,500.00, one-half of which is paid in California, USA to his former wife
by way of alimony; (2) housing allowance of PhP12,000 a month; (3)
representation allowance of PhP15,000.00 a month; (4) two non-revenue
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tickets, first class round trip Manila-New York-Manila every eleven (11)
months of actual continuous service (each ticket would cost a paying
passenger US$2,250.00).

How much gross compensation income should be reported? Give your

answer in pesos, allowing PhP53.50 to every US$. Explain briefly each item
you will include in your answer, and if you eliminate certain items, explain your
reasons therefore.

19. A and B are employed as drivers by Y and Z, respectively, with a monthly

salary of PhP10,000.00 each. In addition, A and B are provided free meals
and living quarters with a monthly value of PhP1,800.00. A eats and lives at
Y’s residence because he is a bachelor and could help in other household
chores like gardening and running errands for the family. On the other hand, B
stays with Z because the latter is a doctor available 24 hours a day. What is
the gross income of A and B? Explain briefly.

20. Capt. Canuto is a member of the Armed Forces of the Philippines. Aside from
his pay as captain, the government gives him free uniforms, free living
quarters in whatever military camp he is assigned and free meals inside the
camp.

Are these benefits income to Capt. Canuto? Explain.

21. What are de minimis and how are they taxed? Give three (3) examples of de
minimis benefits.

22. Mapagbigay Corporation grants all its employees (rank and file, supervisors,
and managers) 5% discount of the purchase price of its products. During an
audit investigation, the BIR assessed the company the corresponding tax on
the amount equivalent to the courtesy discount received by all the employees,
contending that the courtesy discount is considered as additional
compensation for the rank and file employees and additional fringe benefit for
the supervisors and managers. In its defense, the company argues that the
discount given to the rank and file employees is a de minimis benefit and not
subject to tax. As to its managerial employees, it contends that the discount is
nothing more than a privilege and its availment is restricted.

Is the BIR assessment correct? Explain.

23. Mr. Domingo owns a vacant parcel of land. He leases the land to Mr. Enriquez
for ten years at a rental of P12,000.00 per year. The condition is that Mr.
Enriquez will erect a building on the land which will become the property of
Mr. Domingo at the end of the lease without compensation or reimbursement
whatsoever for the value of the building.

Mr. Enriquez erects the building. Upon completion, the building had a
fair market value of P1 million. At the end of the lease, the building is worth
only P900,000.00 due to depreciation.
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Will Mr. Domingo have income when the lease expires and becomes
the owner of the building with a fair market value of P900,000.00? How much
income must he report on the building? Explain.

24. Perlas inherited from her parents large parcels of undeveloped land acquired
by them years ago at the total cost of P500,000.00. Perlas now sells all of
these parcels for P2 million pesos. How much of the gains should she report
for income tax purposes?

Suppose that when Perlas inherited these parcels, they were already fully
developed real estate subdivisions, with small lots being sold on installment
basis. She now sells all these parcels for P4 million pesos.

25. In 2009, Mr. Naval bought a lot for P1 million in a subdivision with the
intention of building his residence on it. In 2018, he abandoned his plan to
build his residence on it because the surrounding area became a depressed
area and land values in the subdivision went down; instead he sold it for
P800,000.00. Is the land a capital asset or an ordinary asset?

26. During the year, a domestic corporation derived the following items of
revenue: xxx xxx (b) interests from money placements in the banks. xxx xxx In
preparing the corporate income tax return, what should be the tax treatment
on each of the above items?

27. Distinguish “Exclusion from Gross Income” from “Deductions from Gross
Income”. Give an example of each.

28. “X” Corporation took a keymen insurance on the life of its President, Mr.
Rodel Cruz. The policy designated Mr. Cruz’s wife as its revocable beneficiary
in the event of death of Mr. Cruz. Will the insurance proceeds be treated as
income subject to tax by the wife?

29. A took out a life insurance policy for PhP1 million naming his wife as
beneficiary. Under the terms of the policy, the insurer will pay A the amount of
PhP1 million after the 20th year of the policy, and his beneficiaries, should he
die before that date. A outlived the policy and received PhP1 million pesos.
The premiums paid on the policy was PhP250,000.00. Is the PhP1 million
received by A subject to tax? Explain your answer.

30. X, while driving home from his office, was seriously injured when his
automobile was bumped from behind by a bus driven by a reckless driver. As
a result, he had to pay PhP200,000 to his doctor and PhP100,000 to the
hospital where he was confined for treatment. He filed a suit against the bus
driver and the bus company and was awarded and paid actual damages of
PhP300,000 (for his doctor and hospitalization bills), PhP100,000 by way of
moral damages, and PhP50,000 for what he had to pay his attorney for
bringing his case to court.

Which, if any, of the foregoing awards are taxable income to X and

which are not? Explain.
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31. 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.

32. Maribel Santos, a retired public school teacher, relies on her pension from the
GSIS and the interest income from a time deposit of PhP500,000.00 with ABC
Bank.

Is Miss Santos liable to pay any tax on her income?

33. Mr. A, a citizen and resident of the Philippines, is a professional boxer. In a

professional boxing match held in 2016, he won prize money in United States
(US) dollars equivalent to Php300,000.00.

xxx xxx xxx

(b) May Mr. A’s prize money qualify as an exclusion from his gross
income? Why?

34. Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold
Cup Boxing Council, a sports association duly accredited by the Philippine
Boxing Association. Onyoc received the amount of P500,000 as his prize
which was donated by Ayala Land Corporation. The BIR tried to collect
income tax on the amount received by Onyoc and donor’s tax from Ayala
Land Corporation, which taxes, Onyoc and Ayala Land Corporation refuse to
pay. Decide.

35. X was the President of a highly profitable corporation which was engaged in
the marketing of Mercedez Benz. When X’s daughter got married to the son of
a Congressman, the corporation gave the newly-wedded couple a brand-new
Mercedes Benz worth PhP8 million pesos and entered the wedding gift in its
books as an advertising expense.

Is the value of the Mercedes Benz taxable income to the couple? For
income tax purposes, will you allow the deduction by the corporation of the
supposed advertising expense? If not, how will you treat the corporate
expense, and what would be the tax liability of the corporation? Explain each
answer briefly.

36. Despite various financial setbacks and heavy losses, Manila Financing
Corporation granted Christmas bonuses of PhP100,000.00 each to its
employees with an annual salary of more than Php180,000.00 and
PhP150,000.00 to those receiving less than PhP180,000.00 per annum. Said
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bonuses amounted to PhP8,600,000.00 which it listed as deduction from its

income for the tax year of 2017.

Rule on the legality of said deduction.

37. 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: xxx xxx (d) amount spent to entertain a judge who decided his first
case. Which deductions are not allowable? Reasons.

38. MC Garcia, a contractor who won the bid for the construction of a public
highway, claims as expenses, facilitation fees which according to him is
standard operating procedure in transactions with the government. Are these
expenses allowable as deductions from gross income?

39. Rakham operates the lending company that made a loan to Alfonso in the
amount of Ᵽ120,000.00 subject of a promissory note which is due within one
year from the note’s issuance. Three years after the loan became due and
upon information that Alfonso is nowhere to be found, Rakham asks you for
advice on how to treat the obligation as “bad debt.” Discuss the requisites for
deductibility of a “bad debt.”

40. Juan dela Cruz, a resident of the Philippines, left for Australia on August 24,
2015 to reside permanently thereat. During his stay in the Philippines, he
received an income of Ᵽ1,500,000.00 from January 1, 2015 up to the date of
his departure. In Australia, he received during the remainder of the year 2015
an additional income of $10,000.00 from sources within that country. Are
these two (2) incomes, Ᵽ1,500,000.00 and $10,000.00 taxable in full? Explain
fully your answer.

41. Patrick is a successful businessman in the US and he is a sole proprietor of a

supermarket which has gross sales of $10 million and an annual income of $3
million. He went to the Philippines on a visit and, in a party, he saw Atty.
Agaton who boasts of being a tax expert. Patrick asks Atty. Agaton: If he
(Patrick) decides to reacquire his Philippine citizenship under RA 9225,
establish residence in this country and open a supermarket in Makati City, will
the BIR tax him in the income he earns from his US business? If you were
Atty. Agaton, what advice will you give Patrick?

42. Delstar Emmanuel Perez, a government employee, retires from the service
upon reaching the compulsory retirement age of 65. Would the amount he is
entitled to receive by way of commutation of his accumulated leave credits, or
his terminal leave pay, be subject to income tax?

43. Atty. MA and Atty. PL were classmates in law school. After passing the bar in
2012, they joined separate law firms in Makati. In 2013, they resigned from
their respective law firms and formed a law partnership under the firm name of
A & L, with office address at Ayala Avenue, Makati. In January, 2014, the two
married each other. After the marriage, they continued to practice law
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together, this time the firm name of L & A-L. This year 2017, being particularly
good year, the partnership anticipates a net income of Ᵽ2.0 million.

a. Is the said law partnership a taxable entity for income tax purposes?
Explain.

b. If the two partners decide to re-invest Ᵽ1.50 million into the partnership
to buy an office condominium and distribute as dividends only Ᵽ0.50
million, how much of the partnership’s 2017 net income will be subject
to income tax? Explain.

44. How often does a domestic corporation file income tax return for income
earned
during a single taxable year? Explain the process.

What is the reason for such procedure?

45. “F” a Filipino holding an immigrant visa and who has been residing in the U.S.
for 4 years returns to the Philippines as a “balikbayan”. He derives income
from the Philippines. He filed a request for the renewal of his passport with the
Department of Foreign Affairs, which refused to act on the same because of
his failure to file his income tax returns in the Philippines. “F” instead
presented his tax returns filed with the Internal Revenue Service in the U.S.
May “F” allege in defense a) non-residence and b) double taxation? Reasons.

46. Indicate whether each of the following individuals is required or not required to
file an income tax return:

a. Filipino citizen residing outside the Philippines on his income from

sources outside the Philippines.

b. Resident alien on income derived from sources within the Philippines.

c. Resident citizen earning purely compensation income from two

employers within the Philippines, whose income taxes have been
correctly withheld?

d. Resident citizen who falls under the classification of minimum wage

earners.

e. An individual whose sole income has been subjected to final

withholding tax.

47. On April 30, 2015, Daryl resigned as the production manager of 52 nd Avenue,
a television studio owned by SSS Entertainment Corporation. 52 nd Avenue
issued to her a Certificate of Withholding Tax on Compensation (BIR Form
No. 2316) which showed that the tax withheld from her compensation was
equal to her income tax due for the period from January 2015 to April 30,
2015.
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A month after her resignation, Daryl put up her own studio and started
producing short films. She was able to earn a meager income from her short
films but did not keep record of her production expenses.

Is Daryl qualified for substituted filing for taxable year 2015? Explain your
answer.

48. Melissa inherited from her father a 300-square-meter lot. At the time of her
father’s death on March 14, 1995, the property was valued at P720,000.00.
On February 28, 1996, to defray the cost of the medical expenses of her sick
son, she sold the lot for P600.000.00, on cash basis. The prevailing market
value of the property at the time of the sale was P3,000.00 per square meter.
Is Melissa liable to pay capital gains tax on the transaction? If so, how much
and why? If not, why not?

49. Mr. A decided to sell the house and lot wherein he and his family have lived
for the past 10 years, hoping to buy and move to a new house and lot closer
to his children's school. Concerned about the capital gains tax that will be due
on the sale of their house, Mr. A approaches you as a friend for advice if it is
possible for the sale of their house to be exempted from capital gains tax and
the conditions they must comply with to avail themselves of said exemption.
How will you respond?

50. Under what conditions are retirement benefits received by officials and
employees of private firms excluded from gross income and exempt from
taxation?