Jackielyne S.

Delos Santos
INSTRUCTIONS: 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.

1. Henne Sy, a 95 year-old man and a resident citizen of the Philippines, is engaged in real property
development in the Philippines. Aside from the real property which he develops and sells in the
Philppines, he also owns an expensive real property located in Hongkong which he acquired as a
long-term investment in 1990 for Php 100M. He intends to give the said property to his
daughter either through donation inter vivos or through a will and since the current fair market
of the said property is now Php 10B, he wants his daughter to sell it at that amount after the title
is transferred to her.

a. You were consulted by Don Pepot and were asked what mode of transfer should he use
to convey the real property to her daughter to legally avoid higher taxes. What advice
will you give? Explain. (10 points)
Donation = 599,985,000
Sale(wth capital gains tax) =
b. If Henne Sy sells the real properties that he develops in the Philippines, will Henne Sy be
subjected to capital gains tax? Explain (10 points).

2. Premier Corporation is a domestic company that is engaged in the manufacture of plastic

packaging products and has a paid-up capital of P5B. In its balance sheet as of December 31,
2015, Premier has a retained earnings of P3B and for the year 2016, its net income amounted to
2B. On December 1, 2015, its board of directors passed a resolution that the company shall invest
1B for the building of a new plant to meet the growing demands of its customers. In the same
resolution, the board also stated that no dividend shall be declared nor distributed for the year
2015.

On April 1, 2017, the President of Premier received an assessment notice which included, among
others, an assessment for improperly accumulated earnings tax. The President asked for your
advice on this issue. What advice will you give? (10 points)

3. In 2014, ABC Bank purchased 1million shares of stocks of XYZ Corporation at P10/share. It also
invested in the bonds of XYZ in the amount of P10M. In 2015, XYZ went bankrupt. Assuming
that ABC Bank has no capital gain for the year 2015, can it claim its investments both in the
shares of stocks and bonds of XYZ as worthless securities that is deductible from its gross
income? (10 points) Explain.

4. Pedro is a full-time employee of BPI Trust Company and works as an investment officer. In 2015,
he borrowed P1million from BPI Savings Bank at 6% interest and lent P500,000 to his brother
Pedrito , who is a sole-proprietor of his transportation business, at 12% . He lent the other
P500,000 to his friend Juan, who is a sole-proprietor of his construction business, at 20% interest.
The loan agreement between him and Pedrito was made in writing while the agreement between
him and Juan was only made orally.

a. What is the tax arbitrage rule? (10 points)

 b. Will the interest from the P1million loan be allowed as a deduction in full amount from the
gross income of Pedro? Explain. (10 points)

c. Will Juan be able to claim a deduction for his interest expense? (10points)

d. How about Pedrito? (10points)

5. Bikoy is the Chief Executive Officer of Matrix Corporation, a security agency. He was able to
secure a security contract worth P30 million with the Department of Transportation . Elated
about this development, the board of directors gave him a bonus of P10 million. The board also
gave P10 million to the Secretary of the Department of Transportation for facilitating the contract.
The said amount was declared by the Secretary as part of his gross income for the year. In its tax
return for year 2018, Matrix Corp. claimed the amounts as deduction from its gross income.

a. Can Matrix Corp. claim the P10 million bonus given to Bikoy as a deduction? Explain (10
points)

b. How about the 10 million given to the Secretary of DOTr? Explain (10 points)