TAXATION II - MID-TERM EXAMINATION

I. Choose the best answer (50 points)

1. A revocable transfer with fair market value at the time of transfer of P300,000.00; fair
market value at the time of death of P180,000.00; and consideration received at the time
of transfer of P200,000.00
a Shall be included in the gross estate at P180,000.00
b Shall be included in the gross estate at P200,000.00
c Shall be included in the gross estate at P100,000.00
d Shall not be included in the gross estate
2. In determining the net estate of a decedent, which of the following rules is correct?
a Real estate abroad is not included in the gross estate of a decedent who is a
resident citizen
b Vanishing deduction must be subject to limitations
c Shares of stocks being intangible property shall be included in the decedents gross
estate wherever situated
d Funeral expenses are deductible to the extent of 5% of the total gross estate but not
exceeding P100,000.00.
3. Y, a Filipino resident, died on November 5, 2002 and his estate incurred losses due to: 1)
fire, which destroyed the improvement on his property on February 2, 2002, and was not
compensated by insurance; and 2) flood, which destroyed his household furniture on
February 25, 2003, and was likewise not compensated by insurance. Which loss can be
deducted from the decedents gross estate?
a 1st loss is not deductible; 2nd loss is deductible
b Both losses are not deductible
c Both losses are deductible
d 1st loss is deductible; 2nd loss is not deductible
4. Which proposition is legally acceptable?
a There can be a deduction for two family homes if their aggregate value does not
exceed P1,000,000.00
b Deduction may be claimed for a family home of a non-resident citizen of the
Philippines located outside the Philippines
c A family home is always either conjugal or community property.
d A single person who is not a head of the family may not have a deduction for family
home
5. When a donation for which a donors tax was paid was actually a donation mortis causa,
as ascertained by the Bureau of Internal Revenue, which of the following statements is
true?
a The donation will be subject to estate tax, and the estate tax due will be reduced by
the payment made for donors tax.
b The property will be valued at the time of death, the same will be subject to estate
tax, and the payment of donors tax will be refunded.
c The payment for donors tax will satisfy the estate tax due.
d The donation is subject to estate tax, in addition to donors tax.
6. In which case will a dowry be subject to donors tax?
a Donation of property located outside of Philippines by a resident citizen
b Donation of a property located in the Philippines by a resident citizen
c Donation of a property located outside of the Philippines by a resident alien
d Donation of a property located in the Philippines by a non-resident alien

7. On the same day, Mr. D made two donations: 1) to a stranger of a property located in the
Philippines; and 2) to a non-stranger of a property located in the Philippines. In
determining the tax credit for the foreign donors tax paid, the credit shall be against the
Philippine donors tax on the:
a Donation to non-stranger
b Donation to stranger
c Donation to both the stranger and non-stranger
8. Case 1: Mr A, in trading business, had a receivable of P150,000.00 from Mr. B. Without
exerting utmost effort to collect, Mr. A cancelled the indebtedness of Mr. B, notified Mr. B,
for which the latter thanked the former
Case 2: Mr. C sold to Mr. D personal property worth P200,000.00 for a consideration of
P50,000.00 to take effect immediately upon receipt of the consideration.
Given the foregoing cases, which proposition is legally acceptable?
a Case 1 amounts a donation of P150,000.00 and should be covered by a donors tax
return with 30 days from the date of cancellation of the indebtedness
b Case 1 does not amount to a donation, but a bad debt expense for Mr. As business
c Case 2 does not amount to a donation, but a mere bad bargain
d Case 2 amounts to a donation of P200,000.00 and should be covered by a tax return
within 30 days from the date of sale.
9. With all the other requisites for the deductibility constant, which of the following properties
of Etang who died on December 4, 2008 is subject to vanishing deduction?
a. Car purchased 3 years ago from Mitsubishi Motors
b. Donation from a friend in 2004
c. Community property inherited on December 2, 2003
d

Apartment inherited from her father in 2005, situated in Canada

10.Who among the following is not subject to donors tax?

a An individual making a donation
b A corporation making a donation
c A partnership making a donation
d An individual who pays premiums on the life insurance of another
11.Complete this statement - A donation inter vivos by husband and wife, jointly during the
marriage:
a is a donation of conjugal property that will require one computation of the donors tax if
the spouses are under the system of conjugal partnership of gains.
b is a donation of community property that will require one computation of the donors
tax if the spouses are under the system of absolute community of property.
c is a donation of exclusive property by either spouse that will require one computation
of the donors tax if the spouses are under the system of conjugal partnership of gains
d is a donation of each spouse to the extent of one-half that will require separate
computations for to donors taxes, regardless of the property relations of the spouses.
12.Which rule will apply to a contribution made by an individual to the Roman Catholic
Church?
a There is no deduction from the gross estate
b The contribution does not amount to a taxable gift
c The contribution is included in the gross gift and a deduction from the gross gift
d The donors tax should be computed using the graduated rates and the tax paid at the
time the contribution was made.
13.In the preparation of donors tax return, which rule must be followed?

a
b
c
d
14.In
a
b
c
d

Dowries must be shown as deduction from the gross gifts

Dowries must not be shown as part of the gross gifts or the deduction thereto
Spouses making donations of conjugal or community property must prepare one
donors tax return
Donors tax on donation to strangers and to non-strangers are computed and shown in
separate return.
which case will a dowry be subject to donors tax?
Donation of property located outside of Philippines by a resident citizen
Donation of a property located in the Philippines by a resident citizen
Donation of a property located outside of the Philippines by a resident alien
Donation of a property located in the Philippines by a non-resident alien

15.Which rule should not be followed in case a donor who made several donations during the
year failed to file the donors tax return for each of the dates he made the donation?
a The failure to file the return will be cured by the filing of a donors tax return at the end
of the year reflecting all the donations made within the year and paying the taxes due
on the annual return
b Each failure to file donors tax return is subject to penalties for non-filing of return and
non-payment of tax on time
c The donor can file a return for each donation, albeit late, and pay the donors tax due
on each return with penalties
d If the taxes were not paid on their due dates because of requests for extension of time
to file the same, each return may be filed within a period of not more than six months
from the date of donation.
16.The following propositions are correct. Which is the exception?
a Mr. A died. His estate is under administration. The estate is a taxable entity.
b Mr. B died leaving an estate. His estate did not go through judicial settlement. The
properties he left are cared for by his eldest child. The estate is taxable entity.
c Mr. C transferred his property to Mr. D, to be held by the latter in trust for Mr. E. The
property earns income. Mr. D was tasked to accumulate the income and turn the same
over to Mr. E when the latter gets married. There is a trust relationship. The trust is a
taxable entity.
d Mr. F. transferred his property to Mr. G, to be held by the latter in trust for Mr. H. The
property earns income. Mr. G was tasked to accumulate the income and turn the same
over to Mr. H when the latter finishes his schooling. At any time, however, Mr. G may
give Mr. H money from the accumulated income when the latter is in dire need of
money. There is a trust relationship. The trust is a taxable entity.
17.Which of the following transactions is subject to 12% VAT?
a. Sale of salted eggs
b. Sale of marinated, frozen and vacuum-packed boneless bangus
c. Sale of buko juice in tetra pack
d. Sale of dried mangoes packed in plastics
18.Which of the following transactions will be exempted from VAT beginning 1 January 2012?
a. Sale of residential lot with gross selling price of P1,990,500
b. Sale of residential house and lot or other residential dwellings with gross selling
price of P3,100,200
c. Sale or lease of goods or properties or the performance of services with gross
annual sales and/or receipts of P1,999,500
d. Lease of residential units with a monthly rental per unit of P12,900, regardless of
the amount of aggregate rentals received by the lessor during the year

19.The sale of a VAT-registered information technology (IT) company of electronic gaming

machines to a freeport zone-registered enterprise is a. Subject to 12%
b. Subject to 0% VAT
c. Exempted from VAT
d. Subject to 5% VAT
20.The sale of books that are converted to electronic or digital format in CD-ROM and DVDROM is
a. Subject to 0% VAT
b. Subject to 12%
c. Exempted from VAT
d. Subject to 5% VAT
21.A company engaged in the business of distributing and supplying electric power executed
several loan agreements containing tranche facility agreements, mortgage bonds and
supplemental indenture in connection with the refinancing and revision of its loan
facilities. Which proposal is legally acceptable?
a. The omnibus loan agreements and tranche facility agreements constitute a single
integrated financing transaction that should be subject to only one documentary
stamp tax.
b. The supplemental bonds and mortgage trust indenture were issued only as security
for the payment of its obligations on its loan agreements; hence, it does not require
a separate documentary stamp tax
c. If the terms and conditions of the loan facility vary, each requires a separate
documentary stamp tax.
d. The supplemental indenture being a mere extension of the original indenture should
be subject to documentary stamp tax independent of the mortgage bonds.
22.Which transaction is subject to 0% VAT?
a. Royalty payments made by a company for technical assistance rendered by a
nonresident foreign corporation
b. Lease of properties by a government owned and controlled corporation
c. Manning and crewing services rendered by a VAT-registered domestic corporation
engaged in recruiting professionals and workers for overseas work to its foreign
principals
d. Use of tollways
23.Which transaction is not subject to 0% VAT?
a. Catering services rendered to international carriers
b. Room accommodations rendered to persons engaged in international air transport
c. Repair services rendered to coastwise vessels
d. Transport of goods from a Philippine port directly to a foreign port
24.Which document requires payment documentary stamp tax?
a. Lotto tickets
b. Sweeeptakes tickets
c. Horse race tickets
25.Which of the following transactions is not a sale; hence, is not subject to VAT?
a Transfer, use or consumption not in the ordinary course of business of goods or
properties ordinarily intended for sale or use in the ordinary course of business.
b Distribution of goods to investors as theirs share in the profits of a VAT-registered
person
c Transfer of goods to creditors in payment of debt
d Consignment sales

26.Which of the following statements pertaining to a taxpayer who becomes liable to VAT for
the first time is incorrect?
a There can be an input tax on purchases he made when not yet a VAT taxpayer
b He must use a VAT invoice on the sale of the goods purchased when not yet a VAT
taxpayer
c He must still use the non-VAT invoices on the sale of goods on hand during the
period of transition to being a VAT taxpayer
d There will be an adjustment in the inventory valuation at the time of transition to
VAT
27.The spouses Helena and Federico wanted to donate a parcel of land to their son Dondon
who is getting married in December, 2011. The parcel of land has a zonal valuation of
P420,000.00. What is the most efficient mode of donating the property?
a. The spouses should first donate in 2011 a portion of the property valued at
P20,000.00 then spread the P400,000.00 equally for 2012, 2013, 2014 and 2015.
b. Spread the donation over a period of 5 years by the spouses donating P100,000.00
each year from 2011 to 2015.
c. The spouses should each donate a P110,000.00 portion of the value of the property
in 2011 then each should donate P100,000.00 in 2012.
d. The spouses should each donate a P100,000.00 portion of the value of the property
in 2011, and another P100,000.00 each in 2012. Then, in 2013, Helena should
donate the remaining P20,000.00.
28.Tong Siok, a Chinese billionaire and a Canadian resident, died and left assets in China
valued at P80 billion and in the Philippines assets valued at P20 billion. For Philippine
estate tax purposes the allowable deductions for expenses, losses, indebtedness, and
taxes, property previously taxed, transfers for public use, and the share of his surviving
spouse in their conjugal partnership amounted to P15 billion. Tong's gross estate for
Philippine estate tax purposes is
a. P5 billion.
b. P100 billion.
c. P20 billion.
d. P85 billion.
29.Exempted from donors taxation are gifts made
a. for the use of the barangay.
b. in consideration of marriage.
c. to a school which is a stock corporation.
d. to a for-profit government corporation.
30.Which among the following reduces the gross estate (not the net estate) of a citizen of the
Philippines for purposes of estate taxation?
a. Capital of the surviving spouse
b. Transfers for public use
c. Property previously taxed
d. Standard deduction of P1 million
31.Ka Pedring Matibag, a sole proprietor, buys and sells kumot at kulambo both of which are
subject to value-added tax. Since he is using the calendar year as his taxable year, his
taxable quarters end on the last day of March, June, September, and December. When
should Ka Pedring file the VAT quarterly return for his gross sales or receipts for the period
of June 1 to September 30?
a. Within 25 days from September 30
b. Within 45 days from September 30

c. Within 15 days from September 30

d. Within 30 days from September 30
32.Don Fortunato, a widower, died in May, 2011. In his will, he left his estate of P100 million
to his four children. He named his compadre, Don Epitacio, to be the administrator of the
estate. When the BIR sent a demand letter to Don Epitacio for the payment of the estate
tax, he refused to pay claiming that he did not benefit from the estate, he not being an
heir. Forthwith, he resigned as administrator. As a result of the resignation, who may be
held liable for the payment of the estate tax?
a. Don Epitacio since the tax became due prior to his resignation.
b. The eldest child who would be reimbursed by the others.
c. All the four children, the tax to be divided equally among them.
d. The person designated by the will as the one liable.
33.Gerardo died on July 31, 2011. His estate tax return should be filed within
a. six months from filing of the notice of death.
b. sixty days from the appointment of an administrator.
c. six months from the time he died on July 31, 2011.
d. sixty days from the time he died on July 31, 2011.
34.Anion, Inc. received a notice of assessment and a letter from the BIR demanding the
payment of P3 million pesos in deficiency income taxes for the taxable year 2008. The
financial statements of the company show that it has been suffering financial reverses
from the year 2009 up to the present. Its asset position shows that it could pay only
P500,000.00 which it offered as a compromise to the BIR. Which among the following may
the BIR require to enable it to enter into a compromise with Anion, Inc.?
a. Anion must show it has faithfully paid taxes before 2009.
b. Anion must promise to pay its deficiency when financially able.
c. Anion must waive its right to the secrecy of its bank deposits.
d. Anion must immediately deposit the P500,000.00 with the BIR.
35.Celia donated P110,000.00 to her friend Victoria who was getting married. Celia gave no
other gift during the calendar year. What is the donor's tax implication on Celias
donation?
a. The P100,000.00 portion of the donation is exempt since given in consideration of
marriage.
b. A P10,000.00 portion of the donation is exempt being a donation in consideration of
marriage.
c. Celia shall pay a 30% donor's tax on the P110,000.00 donation.
d. The P100,000.00 portion of the donation is exempt under the rate schedule for
donor's tax.
36.Levox Corporation wanted to donate P5 million as prize money for the world professional
billiard championship to be held in the Philippines. Since the Billiard Sports Confederation
of the Philippines does not recognize the event, it was held under the auspices of the
International Professional Billiards Association, Inc. Is Levox subject to the donor's tax on
its donation?
a. No, so long as the donated money goes directly to the winners and not through the
association.
b. Yes, since the national sports association for billiards does not sanction the event.
c. No, because it is donated as prize for an international competition under the
billiards association.
d. Yes, but only that part that exceeds the first P100,000.00 of total Levox donations
for the calendar year.

37.A non-stock, non-profit school always had cash flow problems, resulting in failure to recruit
well-trained administrative personnel to effectively manage the school. In 2010, Don Leon
donated P100 million pesos to the school, provided the money shall be used solely for
paying the salaries, wages, and benefits of administrative personnel. The donation
represents less than 10% of Don Leon's taxable income for the year. Is he subject to
donor's taxes?
a. No, since the donation is actually, directly, and exclusively used for educational
purposes.
b. Yes, because the donation is to be wholly used for administration purposes.
c. Yes, since he did not obtain the requisite NGO certification before he made the
donation.
d. No, because the donation does not exceed 10% of his taxable income for 2010.
38.In Operation Kandado, the BIR temporarily closed business establishments, including
New Dynasty Corporation that failed to comply with VAT regulations. New Dynasty
contends that it should not be temporarily closed since it has a valid and existing VAT
registration, it faithfully issued VAT receipts, and filed the proper VAT returns. The
contention may be rejected if the BIR investigation reveals that
a. the taxpayer has not been regularly filing its income tax returns for the past 4years.
b. the taxpayer deliberately filed a false and fraudulent return with deliberate intention
to evade taxes.
c. the taxpayer used falsified documents to support its application for refund of taxes.
d. there was an understatement of taxable sales or receipts by 30% or more for the
taxable quarter.
39.A revocable transfer with fair market value at the time of transfer of P300,000.00; fair
market value at the time of death of P180,000.00; and consideration received at the time
of transfer of P200,000.00
a Shall be included in the gross estate at P180,000.00
b Shall be included in the gross estate at P200,000.00
c Shall be included in the gross estate at P100,000.00
d Shall not be included in the gross estate
40.In determining the net estate of a decedent, which of the following rules is correct?
a Real estate abroad is not included in the gross estate of a decedent who is a
resident citizen
b Vanishing deduction must be subject to limitations
c Shares of stocks being intangible property shall be included in the decedents gross
estate wherever situated
d Funeral expenses are deductible to the extent of 5% of the total gross estate but not
exceeding P100,000.00.
41.Y, a Filipino resident, died on November 5, 2002 and his estate incurred losses due to: 1)
fire, which destroyed the improvement on his property on February 2, 2002, and was not
compensated by insurance; and 2) flood, which destroyed his household furniture on
February 25, 2003, and was likewise not compensated by insurance. Which loss can be
deducted from the decedents gross estate?
a 1st loss is not deductible; 2nd loss is deductible
b Both losses are not deductible
c Both losses are deductible
d 1st loss is deductible; 2nd loss is not deductible
42.Which proposition is legally acceptable?
a There can be a deduction for two family homes if their aggregate value does not
exceed P1,000,000.00

b
c
d

Deduction may be claimed for a family home of a non-resident citizen of the

Philippines located outside the Philippines
A family home is always either conjugal or community property.
A single person who is not a head of the family may not have a deduction for family
home

43.When a donation for which a donors tax was paid was actually a donation mortis causa,
as ascertained by the Bureau of Internal Revenue, which of the following statements is
true?
a
b
c
d

The donation will be subject to estate tax, and the estate tax due will be reduced by
the payment made for donors tax.
The property will be valued at the time of death, the same will be subject to estate
tax, and the payment of donors tax will be refunded.
The payment for donors tax will satisfy the estate tax due.
The donation is subject to estate tax, in addition to donors tax.

44.In which case will a dowry be subject to donors tax?

a Donation of property located outside of Philippines by a resident citizen
b Donation of a property located in the Philippines by a resident citizen
c Donation of a property located outside of the Philippines by a resident alien
d Donation of a property located in the Philippines by a non-resident alien
45.On the same day, Mr. D made two donations: 1) to a stranger of a property located in the
Philippines; and 2) to a non-stranger of a property located in the Philippines. In
determining the tax credit for the foreign donors tax paid, the credit shall be against the
Philippine donors tax on the:
a Donation to non-stranger
b Donation to stranger
c Donation to both the stranger and non-stranger
46.Case 1: Mr A, in trading business, had a receivable of P150,000.00 from Mr. B. Without
exerting utmost effort to collect, Mr. A cancelled the indebtedness of Mr. B, notified Mr. B,
for which the latter thanked the former
Case 2: Mr. C sold to Mr. D personal property worth P200,000.00 for a consideration of
P50,000.00 to take effect immediately upon receipt of the consideration.
Given the foregoing cases, which proposition is legally acceptable?
a Case 1 amounts a donation of P150,000.00 and should be covered by a donors tax
return with 30 days from the date of cancellation of the indebtedness
b Case 1 does not amount to a donation, but a bad debt expense for Mr. As business
c Case 2 does not amount to a donation, but a mere bad bargain
d Case 2 amounts to a donation of P200,000.00 and should be covered by a tax return
within 30 days from the date of sale.
47.With all the other requisites for the deductibility constant, which of the following properties
of Etang who died on December 4, 2008 is subject to vanishing deduction?
a. Car purchased 3 years ago from Mitsubishi Motors
b. Donation from a friend in 2004
c. Community property inherited on December 2, 2003
e

Apartment inherited from her father in 2005, situated in Canada

48.Which rule will apply to a contribution made by an individual to the Roman Catholic
Church?
a. There is no deduction from the gross estate

b. The contribution does not amount to a taxable gift

c. The contribution is included in the gross gift and a deduction from the gross gift
d. The donors tax should be computed using the graduated rates and the tax paid at
the time the contribution was made.
49.In the
a.
b.
c.

preparation of donors tax return, which rule must be followed?

Dowries must be shown as deduction from the gross gifts
Dowries must not be shown as part of the gross gifts or the deduction thereto
Spouses making donations of conjugal or community property must prepare one
donors tax return
d. Donors tax on donation to strangers and to non-strangers are computed and shown
in separate return.

50.In which case will a dowry be subject to donors tax?

a. Donation of property located outside of Philippines by a resident citizen
b. Donation of a property located in the Philippines by a resident citizen
c. Donation of a property located outside of the Philippines by a resident alien
d. Donation of a property located in the Philippines by a non-resident alien

I.

Resolve the legal issues below by identifying the applicable legal basis and discussing
the merits of the arguments presented (50 points).
A
Mr. A is beginning a business. He expected that in his initial year of operations, based on
his feasibility study, he will make sales exceeding Php 1,950,000.00 for the year. He registered
as a VAT taxpayer with the Bureau of Internal Revenue. In his first year of operations, his sales
amounted to Php 1,450,000.00. Is he liable to pay VAT? If he did not register as a VAT taxpayer,
but his sales in the first year amounted to Php 2,000,000.00, would your answer be the same?
Discuss. (10%)
Answer:

a. Yes he is liable to pay VAT. Being a VAT registered person, he

remains subject to VAT although the gross annual sales in his
first year of operations ( Php 1, 450.00) did not exceed the
minimum turn-over of Php 1, 919,500.00. Any person who is
registered under the VAT system shall be subject to VAT

regardless of the amount of his gross annual sales/ receipts

during the year.
b. Yes, he is still liable to pay VAT. Notwithstanding the fact that he
is not registered under VAT system, Mr. A is subject to VAT,
because his business of engaging on sales is a VATable activity
and his annual gross receipts exceed the prescribed minimum
turnover of Php 1, 919, 500.00. Any person who is engaged in
VAT taxable business and whose annual gross sales or receipts
exceed Php 1, 919, 500.00 shall be subject to VAT, whether or
not he is registered under the VAT system.
B
Nene made the following donations in 2008: 1) P 45,000.00, to his son on account of his
marriage in January 15; 2) P 40,000.00 to her daughter, on account of her graduation in March
15; and 3) P 30,000.00 to her youngest child, on account of her 18th birthday in May 15. In which
of the foregoing successive donations will Nene pay donor's tax? Explain. (5)
Answer:

Nene shall

C
On the belief that he was about to die of a liver cancer, Bong sold to Beng a property
valued at P 1, 100, 000 for the same amount. Six months later, Bong died of a car accident. At
that time, the property already had a value of P 1, 300, 000. For Philippine estate tax purposes,
how much is the amount includible in the gross estate of Bong? Discuss briefly.
Answer: The whole amount shall not be included in the gross estate of Bong. Although
the sale or transfer is in contemplation of death, the same is a bona fide sale for an adequate
and full consideration in money or moneys worth. The Tax Code provides that a property which
was transferred in contemplation of death shall be included in the gross estate to the extent of
the interest of the decedent therein at the time of the transfer except in case of a bona fide sale
for an adequate and full consideration in money or moneys worth.
D
Ms. Starling is a citizen and resident of Czech Republic. She died leaving equity ownership
in San Miguel Corporation in the Philippines worth P 3, 000, 000. Czech Republic grants a 50 %
rebate on the estate tax of a Filipino decedent leaving ownership of intangibles therein. Despite
this, the Bureau of Internal Revenue collected estate tax from the estate of Ms. Starling. May the
administrator of the estate of Ms. Starling require the Bureau to refund the tax paid? Discuss.
(10%)
Answer:
Yes, the administrator of the estate may claim a tax refund. As a rule,
intangible personal properties are included in the gross estate of a non-resident decedent if they
are located in the Philippines unless exempted on the basis of the Principle of Reciprocity.

E
On June 30, 2006, X took out a life insurance policy on his own life in the amount of Php 2,
000, 000. He designated his wife, Y as his irrevocable beneficiary to Php 1, 000, 000 and his son
Z, to the balance of Php 1, 000, 000 but in the latter designation reserving his right to substitute
him for another. On September 1, 2006, X died and his wife and son went to the insurer to

collect the proceeds of Xs life insurance policy. Should the proceeds of the insurance form part
of the gross estate of X? Explain.

Answer:
The Php 1,000,000.00 proceeds in favor of Xs wife shall not form part of Xs gross estate
because the beneficiary is other than the estate, executor or administrator of X and the
designation is irrevocable.
On the other hand, the proceeds of Php 1, 000, 000.00 designated in favor of Z, Xs son
shall form part of the gross estate of the latter. Since the designation of Z as irrevocable
beneficiary is not express and clear, such designation, under the Insurance Code shall be
presumed revocable. As such, under the NIRC, the proceeds are includible in the gross estate of
X.